What’s a sure-fire way for the White House to win the hearts and minds of voters? Answer: If a consumer has a Fannie Mae/Freddie Mac mortgage the government can wave a magic wand and reduce his 6% loan down to a market rate of 4%. Sounds simple, doesn’t it?
Well, not exactly. Indeed, the U.S. government controls Fannie and Freddie (the two-year anniversary of their takeover passed quietly last week), but that doesn’t mean Uncle Sam has the power (or legal right) to indiscriminately reduce the contract rates on outstanding loans.
Still, during the dead days of August in Washington, rumors were floating around that the White House was contemplating a “blanket refi” for either struggling homeowners or even all mortgagors with a GSE loan.
The rumor appears to have been ignited by a research report written by a group of Morgan Stanley economists who in late July wrote, “We estimate a potential average rate reduction of 125 basis points on 50% of the outstanding volume of agency-backed mortgages. In the aggregate, the savings amounts to $46 billion per year.” The report was entitled “Slam Dunk Stimulus.”
As the weeks progressed the rumor mutated somewhat and received a bit of press coverage until the Treasury Department shot down the idea. “It was good for a month or so of wild rumors,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association.
He and others considered the idea fanciful, but worried about the side effect of such a maneuver: how can the federal government violate trust agreements on already existing MBS, which is what would have to be done if such an idea were seriously considered.
In theory, a blanket refi program would result in MBS securities yielding 6% (for example) being reduced to (say) 4%. “You might say that some investors were mad as hell when they heard about it,” said Brinkmann. “There was a lot of speculation on the Street. It was all about violating various MBS trusts.”
In the end, the rumor appeared to be just that, but there’s also a school of thought that someone in the Obama administration intentionally leaked the idea as a trial balloon to see what type of reception it might get.
A trade group executive who meets regularly with HUD officials said he heard the talk this summer, too, but like everyone else he could not confirm it. The executive, requesting his name not be published because of his relationship with HUD, said, “For a while this summer there was a sense at HUD that a big shoe was going to drop. There was a lot of running around like a fire drill was going on, but from what we heard there was really no plan, not in the end at least.”
Indeed last week, when President Obama released his plan to help small businesses and increase hiring by U.S. companies there was nothing in it about aiding the mortgage or housing markets. (There was some hope that the White House might introduce yet another tax credit for homebuyers, but smaller than the $8,000 one that expired in the spring.)
The biggest concern about the summer rumor centered around the power of the federal government to repudiate existing contracts—that of mortgages already written and the outstanding MBS created from the underlying loans.
A REIT executive who plays in the MBS market spoke for many when he said, “Can you imagine if they did that? It would totally screw up the MBS market” or as Brinkmann noted, “If they did that, why in the world would anyone even bother trying to create another MBS ever again?”
Even though the refi idea appears to have been a nonstarter, questions regarding the contractual obligation of the federal government in regard to its stewardship of Fannie and Freddie are far from over.
If the White House and a willing Congress choose to liquidate the two—as some elected officials desire—it could (in theory) eliminate $5.2 trillion in federal guarantees on outstanding Fannie/Freddie MBS and loans. Now, that would be something to talk about this fall.
