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More Insanity: Proposals For Mass-Refinancing

Below is the intro for an important paper by Alan Boyce, Glenn Hubbard, and Chris Mayer, which lays out the finances of the mortgage market in great detail and argues for refinancing of all GSE-covered loans. For home owners, this proposal offers hope to obtain the refinance which is their lawful option but is being denied by the large bank/GSE mortgage cartel. Ah, but that "lawful option" comes with conditions: You must have equity. Maybe just a tiny amount, but you must have it. You must have income sufficient to cover the debt. Not just your house either - all your debt. These aren't new conditions either - they existed when you got the first loan. You knew of them, you took the mortgage with full knowledge of their existence, you signed on the line with acceptance of those terms and there's no reason to believe that these terms would stop existing at some time in the future. For investors in RMBS, this proposal is a disaster, a massive pre-payment on vintage RMBS and the loss of tens of billions in net interest margin for the financial system. This paper hopes to shift $70 billion per year from bond investors to consumers and thereby help the economy. The US banking system made $28 billion last quarter. Got your attention now? -- Chris Indeed it is a disaster. Oh, and who holds those RMBS? Pension funds of various sorts, including traditional pension holders and insurance companies that use them as the base for annuities, in the main, as their relatively long duration matches well with their obligations. But this belies the claimed "remedy" put forward in the paper, really. The fact of the matter is that this sort of "streamline" refinance may or may not be a good deal for the average homeowner. Much depends on when they originated their current mortgage - if it has little or no actual amortization on it then the refinance (other than costs inherent in doing so) is a "good deal" for the homeowner.

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