About Government Refinance and Home Purchase Programs

For more than a year the Fed has been buying up billions of dollars worth of mortgage backed securities. Essentially that means that when banks lend money on mortgages they have been able to bundle those mortgages and sell them on the market (mostly to the Fed) and thus free up funds to offer more mortgages. Well the Fed is officially out of the market of buying these mortgage-backed securities (MBS’s) as of today. As a result banks will have fewer buyers of the loans on their books and thus they might have less money available to lend. The end result is expected to be that mortgage rates will be heading up. The big question now is how much will rates change? We shall soon find out but many analysts are expecting rates to only jump about a 0.25%

Here are some excerpts from a recent Business Week article on the topic:

Yields on Fannie Mae and Freddie Mac mortgage securities jumped by the most relative to benchmark rates in five weeks as the Federal Reserve’s unprecedented buying of housing debt drew to a close today.

Spreads on agency mortgage bonds will widen “a bit” and become more volatile after the end of the Fed’s daily purchases, though they probably won’t expand more than 0.2 percentage point, Curtis Arledge, chief investment officer of fixed income at New York-based BlackRock Inc., said today in an interview with Bloomberg Television.

“It’s been one of the more telegraphed changes we’ve seen in a long time,” said Arledge, who oversees about $590 billion at the world’s largest money manager. “The marketplace has positioned itself for the Fed to be absent.”

See this document published over at MakingHomeAffordable.gov. It outlines the new FHA plans for underwater homeowners. Here are some excerpts from the document:

Today the Administration announced adjustments to Federal Housing Administration (FHA) programs that will permit lenders to provide additional refinancing options to homeowners who owe more than their home is worth because of large falls in home prices in their local markets. These adjustments will provide more opportunities for qualifying mortgage loans to be responsibly restructured and refinanced into FHA loans as long as the borrower is current on the mortgage and the lender reduces the amount owed on the original loan by at least 10 percent. This option should be available by the fall.

The new program is contingent on lenders voluntarily writing down the principal balance on these loans. It is not clear yet how many lenders will be interested in doing that or what specific incentives the new program will give the lenders to participate. We will continue to update you here as more information comes out.

The latest installment of government refinance assistance programs was unveiled today. We get this from the AP story on the subject:

After months of criticism that it hasn’t done enough to prevent foreclosures, the Obama administration announced on Friday a plan to reduce the amount some troubled borrowers owe on their home loans.

The multifaceted effort will allow people who owe more on their mortgages than their properties are worth to get new loans backed by the Federal Housing Administration, a government agency that insures home loans against default. …

Rumors are swirling today that the Obama administration will soon unveil a new plan designed to help people who owe more on their mortgages than their homes are worth. Here are some bits from the recent AP story on the subject:

The Obama administration will announce Friday a plan to reduce the amount some troubled borrowers owe on their home loans, after months of criticism that it hasn’t done enough to prevent foreclosures.

The plan will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, people briefed on the plan said. It would be funded by $14 billion from the administration’s existing $75 billion foreclosure-prevention program. …

The plan also will require the more than 100 mortgage companies participating in the administration’s program to consider slashing the amount borrowers owe. They will get incentive payments if they do so. The plan also is expected to include at least three months of temporary aid for borrowers who have lost their jobs.

There was an interesting article in the LA Times recently about the declaration of some lawmakers and a watchdog group that the Obama loan modification program, the home affordable modification program (HAMP) has been a failure. The White House promised several changes to the program to improve it. Here are some excerpts from that piece:

Among the changes to take effect June 1 is a requirement that companies servicing mortgages must prescreen every borrower who has missed two or more payments to determine whether he or she is eligible for the Home Affordable Modification Program. If so, the servicer “must proactively solicit those borrowers” to participate. Those companies also are required to make quicker decisions about eligibility and speedily process documents.

And the program is being expanded to include borrowers who have filed for bankruptcy protection.

Assistant Treasury Secretary Herbert M. Allison Jr. announced the changes at a hearing about the program by the House Oversight and Government Reform Committee. Lawmakers from both parties have been critical of the program’s effect on home foreclosures. …

Rep. Darrell Issa (R-Vista) was more blunt. He said the program had been a failure and actually had increased the pain for some homeowners who had been given the false impression that their mortgage payments could be permanently lowered.

“People are making payments in hopes that it would lead to a solution, when it appears as though a great many of them should be looking for more affordable alternate housing,” Issa said.

With so many US homeowners underwater on their mortgages and so many homeowners defaulting, Bank of America has decided to start a principal reduction program. It appears that B of A has decided it would be less expensive to reduce principal in some cases than to go through the trouble and expense of foreclosure. Here is a bit from the AP story on the subject:

Bank of America is taking a major step to help some of its most troubled mortgage borrowers. The bank says it will forgive up to 30 percent of some customers’ loan principal.

The bank has said Wednesday it will start forgiving principal for homeowners who owe more than 120 percent of their home’s value.

The plan, to begin in May, is among the first by a U.S. mortgage lender that takes a systematic approach to reducing mortgage principal when home values drop well below the amount owed. The effort is aimed at preventing foreclosures.

There was an insightful story over at the Washington Post recently on the vulnerable position that borrowers who have adjustable rate mortgages (ARM’s) are in right now. Rates on ARM mortgages have been extremely low recently as the Fed has kept interest rates low to stave off the recession. But sooner or later the Fed will begin to raise rates and when they do ARM rates (along with fixed rates) on mortgages will start shooting up. For many borrowers who plan to own their homes for years to come it would be wise to lock in a 30 year fixed rate now while rates remain low. Here are some bits from that story:

The stakes are high. The borrower with the 2.6 percent ARM who was paying 4 percent initially probably has a maximum rate of about 10 percent and a rate adjustment cap of 2 percent. That means that if the one-year Treasury rate jumped overnight to 10 percent and stayed there, the ARM rate would adjust to 4.6 percent at the next adjustment, 6.6 percent one year later, 8.6 percent the year after that, and it would top out at 10 percent one year later. Since the fixed rate would escalate with the Treasury rate, the opportunity for a profitable refinance would be lost.

Of course, rates never jump 10 percent overnight. The process occurs over a period of time, which can tempt ARM borrowers to wait until the rate increases start before making a move. But that is easier said than done because the market can move very fast.

In January 1977, for example, the one-year Treasury rate was 5.29 percent. One year later, it hit 7.28 percent; one year after that, it was 10.41 percent, and in March 1980, it reached 15.82 percent. That was an unusual episode, but these are unusual times. Indeed, the rise in rates this time could be even faster.

This big question on a lot of minds is how much should we expect mortgage interest rates to increase when the Fed discontinues its purchasing of mortgage backed securities at the end of this month. The reality is that nobody knows. If the markets step up the impact could be fairly small, if not, rates could shoot up. Here is an excerpt from a recent MoneyWatch piece on the subject:

The bigger concern for higher rates, however, may be what happens to the market prices for mortgage rates, as the Fed stops supporting the market for mortgage-backed securities (in the course of the various rescues it has bought over a trillion dollars’ worth). Most economists are nonchalant, but they also confess to not really knowing what might happen. …

There is an innovative new government-backed program on deck that is designed to standardize the short-selling process for homes. “Selling short” is when a home is sold for less than the amount owed. The value to the seller is that the banks forgive the debt in full and the get to avoid a foreclosure on their credit history. The value to the buyer is they are presumably getting a bargain. The value to the bank is that they presumably lose less with a short sale than with a foreclosure.

But short sales are notoriously hard to pull off because there are always hidden snags. The federal government is looking into ways to make the process easier and more enticing for all parties involved. We get these quotes from a recent NY Times article on the subject:

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser. …

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

There was an interesting article in the Wall Street Journal recently lamenting the fact that so many Americans are missing out on the record low interest rate of the last year by not refinancing. With the Fed set to stop buying mortgage backed securities at the end of this month, rates are very likely to be going up. If you haven’t refinanced yet, have a rate in at 5.75% or higher, and think you could qualify, contact us in the sidebar today.

Here are some bits from that WSJ article:

The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven’t benefited from that because they can’t—or won’t—refinance. …

Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates…

But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low.

“Traditionally, these borrowers would be aggressively refinancing,” said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse.

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years. That’s money consumers can potentially use to help spur economic recovery.

President Obama’s Home Affordable Refinance Program (HARP) has been extended for another year. The announcement came out earlier today. Here is an excerpt from the Washington Post article on the topic:

The Home Affordable Refinance Program was set to expire in June, but so far it has reached fewer than 200,000 of the up to 5 million borrowers federal regulators hoped it would help.

Market conditions have not changed significantly since the program was launched last year, Edward DeMarco, acting director of the Federal Housing Finance Agency, said in a statement. So to give lenders more time to implement the plan and to “support and promote market stability,” the initiative will be extended to June 2011, he said.