The White House plan to refinance upwards of $2 trillion of problematic GSE loans is running into a roadblock: MBS investors, in particular foreign buyers that are allies of the U.S.
According to interviews with advisors, lobbyists, and trade group officials who claim to have knowledge of the effort, the Obama administration is temporarily gridlocked because of investor concerns.
One advisor, requesting his name not be published because of the sensitivity of the matter, said “nothing is moving right now.” He blames investors.
In particular, some investors are worried that 6% MBS they are presently holding could be refinanced at 4%, resulting in a 200 basis point loss in yield – which would be no small matter when you consider that these are multi-million bonds.
Some estimates range as high as $24 billion on annual yield payments that might be lost – but that money would result in cost savings, and an economic stimulus of sorts for consumers.
This advisor added that banking regulators and some of the nation's largest banks also are concerned about what effect a massive refi program will have on their servicing portfolios. One source said that, “At some point you have to consider the greater good. No one ever assured investors that their mortgages wouldn't prepay.”
Mortgage insurers potentially could be losers under an Obama refi plan – but only if MI coverage is not required. An MI lobbyist said that as far as he knew, waiving coverage is not part of the Obama blueprint at this time, but admitted that the White House plan might change.
Bondholders have been raising objections to the refinancing initiative because they stand to lose $13 billion to $15 billion (fair market value) according to Congressional Budget Office estimates. (The CBO estimate is based on changes to the Home Affordable Refinancing Program where massive refinancings of high coupon MBS might occur.)
"Investors know mortgages are subject to refinancing if rates fall below a certain level," Federal Reserve Governor Elizabeth Duke said. (Mortgage rates are now at historic lows.)
However, she noted that MBS investors have been willing to pay up for higher coupons because of the barriers or "frictions" to refinancing. And they have been pricing those frictions into mortgage-backed securities market. "I don't view changing that dynamic as being harmful to the market," Duke said. (For the full story see the weekly paper version of NMN.)
