A federal program that automatically refinances agency mortgages could inject some much needed cash into the economy by passing on the low cost of U.S. borrowing to homeowners -- leaving them with more disposable income. But such a proposition would be loaded with hurdles and might have more luck as an administration initiative than as federal legislation.
The program would provide an automatic approval to refinance existing borrowers who haven't been 30 days past due during the preceding 12 months. Borrowers would lock in at today's low market rates without any investigation into their income, credit or property value. Only rate-term transactions would be allowed.
Borrowers who refinance into 30-year mortgages would secure fixed rates that are hovering around 4 percent today.
The government might pay a 1 percent fee to lenders, and all other lender fees would be prohibited in order for a loan to qualify.
Qualified mortgages would be those that are either insured by the Federal Housing Administration or owned or managed by either Fannie Mae or Freddie Mac.
Fannie's book of business finished June at $3.2 trillion, while Freddie's total mortgage portfolio was $2.2 trillion and FHA's single-family insurance in force amounted to nearly $1.0 trillion.
If only half of the roughly $6 trillion in agency mortgages complete an automatic refinance, the mortgage industry would see a windfall with government-paid origination fees in the neighborhood of $30 billion.
The government's investment in borrowers who have been making on-time payments would seem to have far more upside than the investments that have been made in distressed borrowers.
A variation of the program might be to limit the amortization to 15 years -- which would cut the interest rate to around 3.25 percent as of today. This would create a massive de-leveraging of U.S. consumers without proportionate pain because most borrowers are more than a year into their mortgages already and today's exceptionally low interest rates would likely eliminate the need for higher payments.
The downside to the 15-year option is less immediate cash into the economy.
Former Fannie Mae chief credit officer Edward Pinto, who opposes the idea of an automatic refinance, said that if such a policy were implemented -- then a shorter term would be good since it helps reduce leverage.
Another variation would to include borrowers on multifamily mortgages. Property owners might be required to prove that the lease payments to their tenants were reduced proportionately to the interest rate. In this case, renters would have more disposable income to spend.
Pinto, who is now a Resident Fellow at the American Enterprise Institute, says that the multifamily aspect "opens up a slippery slope of more policy distortions" because of the rent control provision.
Some groups, like appraisers, might oppose any program that excludes the need for valuation assessment. And one Beltway insider says that a program which doesn't require an appraisal would have a hard time flying.
Investors would see their yields slashed as higher-rate mortgages prepaid and they are forced to re-invest at lower market rates.
Creizman LLC Founding Member Eric Creizman says it would be traders on the secondary market who might have a weak-at-best claim since the risk of default would be lower and resulting trading prices would be lower. Most impacted would be institutions or individuals who invest in credit-default swaps or collateralized-debt obligations.
But Creizman doesn't see this group taking action.
"Moreover, I don't think players in betting against the housing market -- wealthy financial institutions and hedge funds -- are going to want to suffer the negative press," Creizman said.
Another group who could have a claim are borrowers in non-agency mortgages.
Creizman speculates that plaintiffs in lawsuits filed because of the legislation would likely be unsuccessful "so long as the government articulates a legitimate public interest, and one can certainly be articulated here."
Pinto doesn't see the automatic refinance as the right solution and says it will only delay a return to a private-sector mortgage finance market. He said that sharing the nation's low cost of borrowing with consumers "ignores the fact that someone or some entity invested in those loans and is earning a return," Pinto wrote in response to an inquiry.
"As is so often the case with government programs, there is no free lunch," the former Fannie executive explained. "We need to incentivize, not penalize savings."
Former FHA Commissioner Brian Montgomery says investors have typically feared such government action. Investors who hold premium securities will be paid less back, and Montgomery questioned whether a proposal would compensate investors.
"On the other hand, with an estimated $1-$2 trillion of agency guaranteed loans held by borrowers who are 200 basis points above current mortgage rates but are unable to refinance due to loss of income, poor credit, or too far underwater, you can't help but target in on a program that could lower their cost of borrowing while also pumping billions of disposable income into the economy," Montgomery, who co-founded The Collingwood Group in 2009, said in a written statement to MortgageDaily.com.
But the former FHA chief doesn't see political parties coming together on something like this.
A former Senate staffer, who asked that he not be identified, agreed that the legislative route in today's polarized environment would stand little chance of succeeding. About the only housing-related legislation that has a chance right now is the Senate bill that would extend the super-conforming limits and is supported by all major housing groups.
Given the stalemate in Congress, a more likely possibility would be an executive order. The former staffer indicated that the Department of the Treasury is working hard right now to determine how the Obama administration can use executive orders to aid the economy.
Issues could arise through an executive order because of the cost of the program, but it is possible that Obama could instruct the Treasury Department to instruct the Federal Housing Finance Agency to do the program, the former staffer said.
However, the administration is likely to focus all of its efforts on its REO-to-rental program proposed earlier this month, leaving no room for programs like an auto-refi.
Many other logistics like title insurance coverage and closing locations would need to be resolved.
The Mortgage Bankers Association ignored multiple requests for a comment about the idea.