Commentary

Federal Refi Program Would Cost Taxpayers Even More Fannie Mae Bailout Money

Talk is heating up on the possibility of a federal refinance program—and so are the critiques. A CBO paper just came out noting the benefits to the housing market from such a program would be minimal. As WSJ reports:

The bottom line: The “estimated gains and losses are small relative to the size of the housing market, the mortgage market and the economy” and, thus, the effects would be small as well, the trio says. A large-scale refi program would benefit millions of borrowers, to be sure, but “would not address many of the problems facing the U.S. housing market,” including borrowers who are already in default or whose mortgages are so big relative to the value of the homes that refinancing isn’t the answer.

I’m going to take this opportunity to dog pile on top of the refi program with another huge issue the White House hasn’t appeared to have thought through.

Back in August, Fannie Mae purchased a portfolio of mortgage servicing rights from Bank of America for $500 million-plus. We actually don’t know the purchase price since the deal has been kept hush hush and no one in Congress seems interested in investigating whether or not it was a bailout. In any event, Fannie Mae acquired MSRs on 400,000 loans as a part of the deal. The thing is that the value of these types of assets is highly susceptible to interest rate changes.

Anything that causes borrowers to refinance or prepay mortgages causes the value of MSRs to decline. And fair value for a portfolio always depends on the delinquency and prepayment experience of the loans in the pool. And a blanket refinance program coming from the White House would certainly cause the value of all those MSRs Fannie Mae just bought—as well as its other MSRs—to lose significant value.

In fact, Fannie is in a pretty dangerous position on this deal. Even though Bank of America estimates the pool of loans has a 13 percent delinquency rate, many outside analysts believe the default rate on the mortgages that underlie the MSRs could be as much as double that. One financial institution that reviewed a portfolio of Bank of America MSRs, which looked suspiciously similar to what Fannie Mae purchased, estimated the loans had a delinquency rate of 25 percent.

Add to that risk the losses from a refinance and Fannie Mae is almost certainly going to take a loss on this deal. And that means the taxpayers pay even more bailout money for the government-sponsored enterprise.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Randazzo is also managing director of the Pension Integrity Project, which provides technical assistance to public sector retirement system stakeholders who are seeking to prevent pension plan insolvency. His research focus on the national public sector pension crisis has a dual focus of identifying the systemic factors that cause public officials to underfund pension obligations as well as studying the processes by which meaningful pension reform can be accomplished. Within the Project he leads the analytics team that develops independent, third party actuarial analysis to stakeholders considering changes to public sector retirement systems.

In addition, Randazzo writes about the moral foundations of economic theory, and is currently developing research on the ways that the moral intuitions of economists influence their substantive findings on topics like income inequality, immigration, or labor policy.

Randazzo's work has been featured in The Wall Street Journal, Forbes, Barron's, Bloomberg View, The Washington Times, The Detroit News, Chicago Sun-Times, Orange-County Register, RealClearMarkets, Reason magazine and various other online and print publications.

During his tenure at Reason he has published substantive research on housing finance, financial services regulation, and various other aspects of economic policy at the federal level. And he has written regularly on labor economics, tax policy, privatization, and Turkish-U.S. political and economic issues.

Randazzo has also testified before numerous state and local legislative bodies on pension policy matters, as well as before the House Financial Services Committee on topics related to housing policy and government-sponsored enterprises.

He holds a multidisciplinary M.A. in behavioral political economy from New York University.

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