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"Research Group" predicts Housing bailout - panic ensues

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  • "Research Group" predicts Housing bailout - panic ensues

    January Surprise: Is Obama preparing a trillion-dollar, mass refinancing of mortgages?

    By James Pethokoukis
    January 4, 2012, 3:46 pm

    This could be just the beginning. If President Barack Obama’s legally dodgy appointment of Richard Cordray to head the consumer finance agency should stick, it may open the door to more such actions. Here’s Jaret Seiberg of the Washington Research Group:

    To us, the most important takeaway from a recess appointment of Cordray is that the President could use this same maneuver to put a housing advocate in charge of FHFA.

    And why is that important? The Federal Housing Finance Agency is the regulator and conservator of Fannie Mae and Freddie Mac. And the FHFA currently has an acting director, Edward DeMarco. If Obama replaces him with a “housing advocate” via the same recess appointment process, here’s what might happen next, according to Seiberg:
    That could lead to a mass refinancing program for agency-backed mortgages that would go well beyond the existing HARP program. That could hurt agency MBS pricing and result in higher financing costs going forward. Yet it also could be a big boost for the economy and housing going into the election.

    Indeed, my sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen. The plan would be modeled after one originally devised by Columbia University economists Glenn Hubbard (a campaign adviser to Mitt Romney and AEI visiting scholar) and Christopher Mayer. In recent congressional testimony, Mayer described how the mass refinancing plan would work:

    Under our plan, every homeowner with a GSE mortgage can refinance his or her mortgage with a new mortgage at a current fixed of 4.20 percent or less. … To qualify, the homeowner must be current on his or her mortgage or become so for at least three months. … Other than being current, we would impose no other qualification or application, except for the intention to accept the new rate (that is, no appraisal, no income verification, no tax returns, etc.).

    Mayer estimates that some $3.7 trillion of mortgages would be refinanced. That’s right, this would be the Mother of All Mortgage Refinancing Plans. It would help roughly 30 million borrowers save $75 billion to $80 billion a year. As Mayer puts it: “This plan would function like a long-*lasting tax cut for these 25 or 30 million American families.”

    On his website, Hubbard says the plan would have an immediate fixed cost to the government of $121 billion $242 billion with half that cost split equally between the government and lenders. And he calculates the economic impact as follows:
    1. We estimate that 72 percent of owner occupant homeowners would be eligible to refinance at no cost to them. Their monthly mortgage payments would fall by an average of $355, for a total national fiscal injection $7.1 billion each month.

    2. The typical borrower would reduce his or her principal and interest payments by about $350 dollars, a total reduction in mortgage payments of nearly $100 billion per year.

    3. The macroeconomic stimulus effect should also include an additional housing wealth effect. At the low end of our estimates, improved mortgage market operations would reduce house price declines by 10 percent. With an estimated aggregate housing valuation of about $18 trillion, housing wealth would increase about $1.8 trillion relative to what it might fall to without this program. If we assume a relatively low marginal propensity to consume out of housing wealth of 3.5 percent, U.S. consumption would rise by $63 billion relative to what would otherwise have occurred.

    4. Combining these estimates gives a total macroeconomic stimulus of as $118 billion per year in lower mortgage payments and any new consumer spending due to a housing wealth effect. In addition to the direct macroeconomic stimulus, jump-starting the stalled housing market will increase employment in a variety of industries that depend on housing transactions (mortgage and real estate brokers, home supply companies, moving companies, etc.) as well as increase the efficiency of the labor market by reducing impediments to households moving to take another job.

    Bottom line: Talk about a political and economic game changer in this presidential election year. Obama could offer a trillion-dollar stimulus — as measured over a decade –that would directly and immediately impact tens of millions of Americans suffering from the housing depression. Cash in their pockets. Imagine the electoral impact on key states, such as Florida, suffering from both high unemployment and devastated housing markets.

    And the beauty part for Obama? He wouldn’t need approval from Congress to do it. Even though many Republicans would scream that the plan would reward irresponsible homeowners who took on too much leverage — indeed, talk of a housing bailout is what launched the Tea Party movement – they probably couldn’t stop it. And Hubbard already has an answer to the moral hazard issue: “This proposal requires borrowers to give up a share of future appreciation in order to participate. Lenders must eat a portion of the losses as well. Everyone gives a little bit.”

    The 2012 battle for the White House is looking razor close. A mass refinancing plan might be enough to tip it to Obama.

    Bank of America Corp. (BAC), the second- biggest U.S. lender, surged by the most in two months of trading amid speculation that the Obama administration may introduce a nationwide loan refinancing program.

    Washington Research Group??

    Orphaned by the demise of parent company MF Global Holdings, Washington Research Group, a 17-member government policy analysis team in the District, has found a new home at financial services firm Guggenheim Partners.

    The move marks the 10th time the research group has changed hands in the past 37 years. Yet analysts say its preservation amid the constant shuffles illustrates the continued demand for political insight within the financial service sector.


    “Having been through this nine times in 37 years I was confident the phone would ring. It did. We had eight suitors within several days,” Garlich said. “We decided upon Guggenheim based on its overall leadership, the culture of the firm and the business model.”

    Since Garlich founded Washington Research Group in 1973, the company has passed from a number of high profile owners, who have, in many cases, collapsed. It once belonged to Drexel Burnham Lambert, the investment firm that filed for bankruptcy following a criminal investigation of executive Michael Milken; and Stanford Financial Group, which folded after its founder R. Allen Stanford was indicted for investment fraud.

    Speculation about the move to Guggenheim, headed by former Bear Stearns chief executive Alan Schwartz, appeared in the New York Times two weeks ago. The paper reported Royal Bank of Canada and Macquarie of Australia were among several parties making a play for the group.


    Political intelligence firms, like Washington Research Group, have become key partners for hedge funds and money management firms, especially in the wake of financial reform. Integrity Research Associates, which tracks investment research firms, estimates the political intelligence industry has grown into a $100-million-a-year business in Washington.
    Last edited by Slimprofits; 01-05-12, 04:37 PM.

  • #2
    Re: "Research Group" predicts Housing bailout - panic ensues

    Without knowing the details, I'd be more than a little surprised if this was anything but talk.

    The only way I could see this possible happening is if the process also managed to enrich the banksters/TBTF banks - and frankly I don't see how such a program could be managed without some form of write-down, because the only owners who haven't refinanced yet to take advantage of historically low rates are those with negative equity who cannot.

    Now if on the other hand the 'program' is yet another big talk, no walk Obama initiative, that I could believe. It would be right in line with HAMP and (insert alphabet soup here).


    • #3
      Re: "Research Group" predicts Housing bailout - panic ensues

      He has to do "Something"........we know QE3 or "Nomal GDP targetting" starts in May........war with Iran in June........



      • #4
        Re: "Research Group" predicts Housing bailout - panic ensues

        Hmm. What if Obama really does intend to help the people... by jump starting the economy at the last moment before the election, he gives himself enough momentum to win regardless of where infusions of money are spent. Then in his second term he can really get down to business because there are no more elections to worry about...


        lol, not likely


        • #5
          Re: "Research Group" predicts Housing bailout - panic ensues

          from Zerohedge . . .

          Looking for a reason why the surge of BAC has been abruptly halted after hours? Look no further - as predicted earlier, when we commented on the periodic reincarnation of the always false global refi rumor which served among other things to push BAC higher by almost 10%, the rumor was found to be false... all over again. In other words no refi, no benefit to TBTF, and all of today's gains are based on what Bloomberg noted was a report issued yesterday by a Jaret Seiberg, who until recently was an employee of MF Global, and has since been acquired with his entire Washington Research Group by none other than Guggenheim partners, which just happens to be run by former Bear Stearns exec Alan Scwhartz. From Bloomberg, here is the official denial (which came literally seconds after market close):

          • White House Has No Plan for Mass Home Refinancing, Person Says

          Incidentally, even if the rumor was true, here is JMP explaining why it would have no real impact on Bank of America

          Bank of America (BAC, $6.28, Market Perform): Market Overly Optimistic About the Impact of a Hypothetical $1 Tril. Refinance Program, in Our View

          Shares of BAC were up 8% today as rumors swirled that President Obama may enact a $1 trillion refinance program. Granted, BAC shares were trading at a big discount to book (0.4x), and the investment community--now with several months of runway--seems to be going "risk on". But the big upward move on this news seems more a grasp for "validation", and we don't believe it will stick.

          We must point out that BAC is up big, while JPM and Citi are only up with the broader bank index. This suggests that the market is focused on the mortgage-loss exposure specifically as this is uniquely troubling at BAC. Were the market focused on the big potential one-time benefits of mortgage production fees (in our view, the lone positive), they would all be up big, but this is not the case. Meanwhile, servicing revenue should obviously be a zero-sum game.

          Thus, we focus our discussion on the loss exposure. The key risk to BAC is the looming threat of material mortgage putbacks (reps and warranties). These are not new losses but losses already locked in and incurred by others that are merely redistributed to BAC retroactively via the legal system. No refinance program will undo these losses for which, in most cases, the foreclosure has been completed.

          As for the matter of avoiding new losses by saving currently wobbly homeowners, we question the efficiacy of a refinance program when the key issue is jobs--where the homeowner has no income nor liquid asset buffer, a lower payment isn't going to matter. More generally, as we have seen with prior attempts, these programs are more about kicking the can down the road, so it's more about delaying future losses than avoiding them altogether.

          Many homeowners could already materially lower their payment (or avoid a looming balloon) via refinancing but can't do so because of the LTV. Thus, we presume any big refinance program would have to include the U.S. government providing mortgage insurance to the lenders/investors, which creates incremental risk for the U.S.

          We will leave it to the political analysts to opine about whether or not President Obama can even get away with enacting a $1 trillion program that incurs large amounts of financial risk to the U.S. government. Our view is that, even if this comes to pass, the impact on BAC's putback risk is negligible, so the stock continues to deserve a steep discount and today's move is likely to prove fleeting.


          • #6
            Re: "Research Group" predicts Housing bailout - panic ensues

            No Change for another 2 years
            my post 2 years ago


            bill, 3-24-2010
            What should happen, but won’t.
            Gov. needs real and enforced regulation on banks holding nonperforming assets forcing liquidation, cleaning the system. Mark to market pricing selling assets would bring down housing pricing to average annual income affordability. Government backed program intervention has only delayed price decreases and will take years for debts to be paid down. . Government is protecting banks and bond holders guaranteeing mortgage collections using taxpayers funds. Note modifications are only a short term fix. As home pricing devalues home owners will soon find themselves in the same situation before the note modification. Delaying the debt deflation using programs with government backing will only delay affordable pricing and keep homeowners in debt they cannot service. Homes need to be sold for cash or terms on an open market bidding system. Pricing would drop fast allowing existing in debt home owners to walk away from their existing home and repurchase, lowering their debt payments. Thus, lowering debt payments would allow for more savings or spending giving the economy a little breathing room.

            Government/Servicers will avoid foreclosure filings and rework debt. Few sales transactions take place as debt is reworked internally by note holders and government. It will take years and market
            re-pricing as government inflates creating price stability in nominal terms.
            Servicers granted powers by HAMP will be the processor for government regulations.
            Home owners that walk away and or not eligible for HAMP processing will be legally prosecuted for debt collections, borrowers with credit worthiness will be lien for debt collection. Others will be sign on for note modifications agreements. Short sales will be granted only if recourse of lien holders can be enforced and debt collected.

            Now comes B of A.