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Thread: "Research Group" predicts Housing bailout - panic ensues

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    Default "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 at 04:37 PM.

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