In remarking on the president’s new proposal for targeted mortgage subsidies Keith Hennessey observes:
Many elected officials have a bias toward government action: they see a problem and ask “What can we do to fix it?†The solutions they embrace often arise from an iterative process in which advisors compare the problems that exist with the policy tools available to address them and make the best possible match.
Sure. Nobody ever got re-elected for forbearance.
For more detailed commentary on the proposal see Bruce Krasting or Felix Salmon. The consensus on the proposal, for which only mortgages owned or insured by Fannie Mae or Freddie Mac and which are presently worth 80% of their face value or less appear to be eligible, seems to be that it’s a pathetic attempt to appear to be doing something. If our problem is a Keynesian one of inadequate aggregate demand, it will help very little: the amount involved is less than .1% of the president’s jobs plan.
If our problem is a problem of household balance sheets, it will do accomplish less than that.
If this weren’t, what, the fourth try at addressing this particular problem you might say at least it’s a first step. I wonder how effective even the political aspect of the plan will be when they figure out how much of the benefit will go to the 1%.
I guess this is what our political system produces these days. A journey of 10,000 miles, one pratfall at a time.
Update
Yves Smith is even more critical:
This plan will at best provide only modest help to homeowners. And in some cases, it will worsen their position. In some states, a purchase money mortgage is non-recourse. In all state, my understanding is a refi is recourse with only narrow exceptions.
It will have virtually no impact on the housing market because it will keep loan balances at the same inflated levels. Similarly, it will not contribute in any way to new construction.
Her sense is the same as mine: the Administration desperately wants to be seen to be doing something, effective or not. Howwever, she also adds that this proposal is bank-friendly, which echoes my point above on the 1%.
It’s not like the bias to do something is unknown. To be fair, though, one rarely if ever hear’s a voter saying, “Don’t just do something, stand there!”
I still think there are Constitutional issues with principle reduction that appear to be overlooked in the linked criticisms. But looking at the new plan, I have to wonder if the White House lawyers think the problem is more extensive than I thought. Why else would it be voluntary for the banks to participate?
It may be that the lawyers found compulsory modifications of mortgage instruments outside of bankruptcy/foreclosure to be uncharted territory, likely to produce litigation all the way to the SCOTUS. That may create enough uncertainty to kill the program.
I’d say there were constitutional issues with the previous attempts and with the GM/Chrysler bailouts. There’s just nobody with standing who’s not in to profit by the deal.
I’d say there were constitutional issues with the previous attempts and with the GM/Chrysler bailouts. There’s just nobody with standing who’s not in to profit by the deal.
Couldn’t Jane/Joe Schmuck, Taxpayer-at-Large, have standing, given her/his money was/is getting spent? Or any Congress Critter opposed to the deal?
For that matter, couldn’t someone who didn’t meet the criteria for the re-fi take legal issue, given that it’s a case of picking winners and losers, and they got picked to lose?
I’m also confused by why no appraisal is required? To be eligible, the current loan-to-value (LTV) ratio must be greater than 80%. If there is no appraisal, what establishes current value?
If there is no appraisal, what establishes current value?
Assessed value for property tax?
I don’t know the legalese basis of this comment. But, it certainly seems like this new mortgage gimmick rather arbitrarily eases mortgage payments for a 1% select few. Consequently it seems reasonable to think it would be subject to some kind of legal recourse from those struggling with similar mortgage problems, but not making the cut in the perimeters set forth.
A valid question, PD.
That’s the problem, in that no current value can be established without a current property appraisal, which would entail including current house sales in your area rendering a more accurate assessment of what the current property evaluation really is.
As far as the assessed property value on one’s property tax bill, it would be based on older, higher values, unless the property owner had filed a recent appeal with the tax assessor, and had won a lower value which would have then lowered his property taxes.
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Banks with rare exceptions own the mortgages. Banks originate the loans, and they make money on each loan approved. Fannie & Freddie own about 80% of US mortgages, and the Fed owns or backs most of the rest. This is why interest rates are so low. MBS’s are one of the safest investments, but the yield is low. (Follow the CDS’s.)
Mortgages without a pre-payoff penalty do not need to be forced. As long as there is someone willing to pay off the mortgage, there are no legal issues. A refi pays off the original mortgage at FULL value, and a new mortgage is originated. It is approved based upon the MBS underwriter’s “rules”. The originator takes their fees up front.
The reasoning behind allowing the homeowner to refinance the mortgage is that they are already paying off the loan. The fact that the house is underwater is irrelevant. They owe a certain amount on the loan, and it is secured by a house that is worth less than the loan. Allowing them to refinance the loan will bring down their monthly payment, and there is a better chance of them staying current on the loan.
The difference in monthly payments can be substantial. One of the factors is the new mortgage is for 30 years, and the other is the interest rate. This can be verified with any online mortgage payment calculator.
“For the Snark was a Boojum, you see.”
As far as the assessed property value on one’s property tax bill, it would be based on older, higher values, unless the property owner had filed a recent appeal with the tax assessor, and had won a lower value which would have then lowered his property taxes.
That has not been true here in Orange County Florida. My mother’s house has seen its assessed value drop ~80% in the last few years. The last (estimated) assessment alone saw a drop of over 46% in her property value, y-o-y. That’s the assessed market value, not something after various exemptions have been applied. It’s getting to the point where the fee for the street lights is within shouting distance of the actual property tax.
That hasn’t been true here in California. It’s good, though, that Florida is not putting homeowners through the hoops of requesting an appeal, and simply implementing this lower house value themselves. Whew, an 80% drop — that’s incredible! I appreciate your info on this.
I have a nephew living in Coral Springs. I’ll ask him if this same downward assessment is happening in property his tax bill. He could sure use a break, as both he and his wife are chronically in and out of work with two young kids to support.
Various articles from the local rag about our proerty taxes. Distribution of value drops has not been even, as you would expect.
Orange County property values continue to slide
Property values slide, but Orange tax bills slated to go up
Housing slump hits black, Hispanic neighborhoods hardest
Pine Hills is where my mother’s house is.
It’s good, though, that Florida is not putting homeowners through the hoops of requesting an appeal, and simply implementing this lower house value themselves.
What’s hard to believe is that Florida may have gotten something right. I’m sure the current governor will get around to correcting that once he adds the 700,000 new jobs he promised.
Tastybits was on a roll, and then had a train wreck in his/her logic.
The price of equities is repriced everyday. Its called the NYSE. The bondmarket reprices everyday, it called the bond market.
What Tasteybits wants you to believe is that a mortgage asset/liability (depending on what side of the deal you are on) is exempt from this repricing reality.
No chance. No chance whatsoever. So if provisions are put into place by the Feds that distort mortgage market pricing (risk/reward), someone is getting subsidized, and someone is getting hosed (read: the taxpayer).
Crap logic, and no corporate finance understanding whatsoever.
The taxpayer is on the hook for almost all primary mortgages in the US. Very few banks own actual mortgages, and many of these are still backed by the taxpayer.
MBS’s are bond like, but there are differences. Since MBS’s are backed by the taxpayer, they are considered “safe”. This is a generalization, but it is close enough. Interest rates are based upon MBS demand. As MBS demand rises, interest rates decline. Since the government is backing the market, repricing has nothing to do with the quality of the mortgages.
The wisdom of the government backing the US home mortgage industry is another matter, but due to government intervention, the mortgage financing market is being distorted. The mortgage “bond” buyers are being subsidized through lowered risk, and unless the government is now backing corporate bonds, this has nothing to do with corporate financing. But, I suspect a little investigation into this area would be prove otherwise.
The mortgage industry does not work the way most people think it does. Furthermore, few people understand the government’s involvement in the financial industry. To assert that allowing responsible homeowners to refinance their mortgage at a lower interest rate will have any bearing on the mortgage “bond” market is laughable. The government/taxpayer is backstopping 6 to 10 Trillion dollars of mortgages, and in the financial industry, we are backstopping 50+ Trillion dollars of CDS/Derivatives.
The US went “down the rabbit hole”, “through the looking glass”, and/or “jumped the shark” a long time ago. When the President “abandoned free-market principles to save the free-market system”, it should have been obvious to anyone that “we aren’t in Kansas anymore.” The markets are so distorted that they are “exempt from reality”.
Now. I assure you that TastyBits does not want you to believe anything that he/she puts forth. You can do with it what you want. These bits are thrown out as alternate views, and most of them are at odds with the conventional wisdom. The reasoning to support unconventional wisdom is enormous, and therefore, the logic may seem to be wanting.
Of course, what do I know?
“For the Snark was a Boojum, you see.”
I see that Megan McArdle’s lawyers are also pointing to the Constititutional problem. Link
The more I think about it, the more I think the government cannot force the banks holding the mortgages to redo their terms involuntarily, either reducing principal or interest, without “just compensation” to the banks, including some thorny procedural and valuation issues, that would make even successful efforts wasteful in time and resources.
Instead of trying to find what is permissible that approximates our moral sense of justice (take from the banks and given to the lender), we should figure out what is the desirable end state in our housing market. Unfortunately, I think that is lower housing costs and the flexibility to move where the jobs are.
PD, if there’s one thing we should have learned from the GM/Chrysler bailouts it’s that little things like legality and constitutionality won’t be allowed to get in the way of a good solution.
While I think that the likely and, probably, best case outcome is that housing prices will continue to fall for a good long while, the urge to do something may be irresistible and, as is also mentioned in Megan’s comments, the federal government has a lot of leverage to wield over banks that could sidestep the Takings Clause or inviolability of contacts issues.
[I]f there’s one thing we should have learned from the GM/Chrysler bailouts it’s that little things like legality and constitutionality won’t be allowed to get in the way of a good solution.
Or even a bad solution.