Friday, August 26, 2011

Residential - Refi the entire market?

So, the government is going to cause a ginormous refi wave in resi-land, at least that has been the rumor for well over a year now. Instead of demanding MORE collateral from homeowners who owe mortgage debt that is no longer protected adequately by the underlying collateral's value, you constantly hear some politician babble on about saving the poor non-delinquent mortgagor from having to meet obligations that he agreed to in writing and backed with the most precious collateral (the roof over his family's head) - I find the entire affair somewhat disgusting if you cannot tell. You agreed to make payments, you put up collateral in the event you cannot pay, and those are the terms.

I'm sure I will not be consulted for my opinion, but the rumors are now starting to crescendo, and I am really interested in your thoughts on how this might be structured and how to gain from it in the market... PLEASE LEAVE YOUR THOUGHTS IN THE COMMENTS!

  • Do they only allow Agency mortgages to refi? (Ginnie too, or just the two in conservatorship?)
  • What credit characteristics are allowed? Low FICO? Underwater mortgages? Currently not-late?
  • Do borrowers have to pay additional amounts to help protect the mortgages (they have higher LTVs, do they pay higher PMI? Is there some new product to help protect the lender against the greater sensitivity to both credit and systemic valuation changes?)
  • Who gets to originate the mortgages? and thus receive the origination fees?
  • Servicer? Can BOA originate and service them but put the risk to the Agency?
  • Will they be securitized - who is going to buy this, and what type of protections are there going to have to be (obviously at a cost to the taxpayer) to protect these new investors?
  • Who else benefits?
  • Who gets hurt? Does my Ginnie IO from 2009 origination, low coupon, ramp up and flicker out? How about my Fannie IO from 2005, high coupon? What about POs (they seem a little rich)?
I actually can see a path that is economically feasible, politically palatable, and hugely profitable to certain key players in the industry. If you are a policy maker, the Bernank, or Obama bin President, please email me at for a detailed plan. All jokes aside, I am working on it, please don't do anything stupid that will destroy our economy in the meantime.


NoVaCre said...

Should be limited to only the two in conservatorship, only borrowers that are current on their loans and can meet all requirements for loan, except LTV, should be allowed to qualify. No more modification games, which has prolonged this process long enough. With stimulus funds leaving the system and employers refusing to hire due to a lack of end demand, we need household balance sheets to be repaired immediately, something that has not happened since this little adventure began in '07. There isn't much time left to do this - we are already seeing troubling signs on growth and we're doing everything possible to repeat the mistakes of 1937. With stimulus funds leaving the system we need the 70% of our economy driven by consumers to begin to grow again. Blaiming everything on "Obama Bin President" is not going to fix anything.

Anonymous said...

Sorry if I'm being captain obvious here DarkSpace but if you have access to Bondhub or are covered by the dealer's structured products S&T you can request a copy of their weekly Structured Product Weekly research.

1) Barx - Good stuff
2) JPM - Good stuff
3) NMRA - Good Stuff
4) CSFB - Good stuff

No doubt they will touch on the refi issue in there and Barx will probably have a special report on it as they keep it thorough.

Concrete Jungle said...

My comment didn't post!#?! I want reconstruct the entire comment, but...

Regardless, no worries, but I do assume that most of us get the standard street research.

Deutsche Bank actually had a piece out yesterday titled "The risks from" that was leaning towards the highest probable path being a reduction in fees charged by the Agencies, and really all the scenarios they laid out resulted in relatively small impacts on prepayments.

Nomura seems to think that the more probably result will be loosened underwriting standards and an expansion of HARP (lower credit hurdles, removal of origination date restriction, etc.).

The nuclear option, to use someone else's term, is to just allow all borrowers refi at lower rates (perhaps limiting to just Agency mortgages) with little regard to payment history, overall credit, or LTV. An improperly motivated politician may choose this option - it puts cash in people's pockets, new rounds of fees into the Agencies, political goodwill amongst borrowers, but enormous new risks and stealthy stealing from the taxpayer. Not too mention it would just crush any remaining faith in the mortgage market.

Anonymous said...

Damn good stuff C. Jungle. Thank you for that.

-Anon Commenter #1

crabsofsteel said...

FHA is already guaranteeing loans > 100% combined LTV

it hasn't stopped anyone from buying GNMAs, so why not go the next step?

R said...

and the houseless 20somethings get fucked again by the interests of the homeowners. Sorry but fuck all of them and none of them deserve any bailouts. I'm so sick of all this gov't funded ponzi scheme bullshit constantly screwing over any sort of free market.