WSJ: White House Considering Expansion of Underwater Refi to All Mortgages, not Just Government Backed « Market Montage

One significant stimulus we've been seeing the past year or so, largely ignored by the media, is the refinancing boom happening for those who have government backed loans but are severely underwater.   The rules were changed (I believe late 2011) so anyone with a government backed mortagge, regardless of how far below water one is, could refinance and that has had a quite substantial.  The old rules had been expanded to up to 125% LTV but since that did not capture enough of the pie it was moved to "anyone".  Of course that left out those who have private loans but news being slipped out during this quiet period when no one pays attention is the White House wants to expand this program to include them as well. Of course this would transfer more risk to Freddie and Fannie but frankly they have been run as a stimulus program since the crisis, so nothing new there.

Via WSJ:

  • About 22% of all homes with a mortgage, or around 10.8 million homes, were worth less than the outstanding balance at the end of June, according to CoreLogic. That number has fallen from 12.1 million at the end of last year as home prices have picked up, but around 10% of all homeowners with a mortgage are still deeply underwater.
  • Fannie and Freddie own or insure about half of all home loans, and most underwater borrowers with their backing can refinance to get a lower mortgage rate as long as they are current on their loans. That initiative has benefited holders of more than 330,000 underwater mortgages through October this year, up from around 60,000 in all of 2011. "It has been unbelievably successful," said Scott Simon, who heads the mortgage-backed securities group at Pacific Investment Management Co.
  • Officials at the Treasury Department and the White House now would like to include borrowers who have been locked out because their loans aren't backed by the firms. Those loans are held by private lenders or investors, and some of them were issued by subprime lenders and bundled into securities by Wall Street firms.
  • Some 24% of outstanding loans in privately issued mortgage bonds, representing around $226 billion in loans to about 900,000 borrowers, are current on their payments and underwater.
  • Because such a move would transfer billions of dollars of these mortgages to the government-backed mortgage companies, it would require congressional authorization to temporarily change Fannie's and Freddie's charters.
  • Under the proposal, Fannie and Freddie would be allowed to charge higher rates to borrowers in order to compensate for the risk of guaranteeing refinanced loans that are underwater and more likely to result in default.  But industry officials say such a program would work only if banks were given immunity from having to buy back any loans they refinance that subsequently default, and that such a shield would boost the risk for the taxpayer-backed companies.   Allowing the firms to "reload up their balance sheets…will ultimately be a taxpayer expense," he said.

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