Broad scale, government-backed refinancing is a weak stimulus that does not have the power to cure the negative equity pit ailing millions of underwater borrowers, said housing analyst Edward Pinto during his keynote presentation at SourceMedia’s Best Practices in Loss Mitigation Conference in Dallas.
Instead, the American Enterprise Institute resident fellow—known for his harsh views on government intervention in housing—proposes targeted modifications for severely underwater borrowers who are current.
According to Pinto’s calculations, such measures can reduce Fannie Mae and Freddie Mac’s taxpayer losses by about $10 billion.
His “modest proposal” targets severely underwater, nondelinquent GSE loans with a combined loan-to-value ratio of 120% or higher.
Such a program, which consists of a constant payment alternative, would apply to loans guaranteed by Fannie and Freddie before they went into conservatorship in September 2008.
The goal would be to retain the same monthly payments these borrowers have been paying for an average of five years and modifying the interest rate on the loan down from an average of 6.1% to today’s low rates of roughly 3.5%. He also suggests loan terms of anywhere from 15 to 17 years.
“This approach is very targeted and much more simple to execute,” he said. It will accomplish “the goal of rapid deleverage as the loan would now pay off in 15 to 18 years, and present little or no moral hazard.”
Pinto sees an advantage to dealing with underwater but current mortgagors because they have shown a consistent behavior to pay and are less likely to default on purpose.
But there is a catch for the GSEs. “Have Fannie and Freddie buy the to-be-modified loans out of the mortgage backed securities’ pools at par,” he said, which will make the intervention fair to the bondholders. His rationale: “These withdrawn loans are in the MBS that benefited from the direct taxpayer bailout of Fannie and Freddie, a bailout that was not legally required.”
He said there is a legal maxim here that reads: “Those that seek equity must do equity.”
Pinto estimates that administration efforts to keep rates low have resulted in 14 million residential refis since 2009.
