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.