Mortgage "Fix" Lowers the Boom on Savers

Friday, 23 Sep 2011 12:01 PM

By Bill Spetrino

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President Barack Obama's speech a few weeks back signaled what his real plan is to fix the economy: He is undertaking a massive mortgage refinancing push.

Of course, as with most political speeches, Obama gave little in the way of concrete detail.

But he did say, "
We are going to work with federal agencies to help more people refinance at interest rates now near record lows of 4 percent," and indicated that he won't allow the move to get hung up in Congress, saying, "My administration can and will take steps on our own."

What the White House did not do is give any details on where the refinancing funds will be coming from. My guess is that a settlement between the banks, states' attorney generals and the federal government is going to provide part of the funding needed.

This settlement, which has been in negotiation for almost the entire year, should end up around $20 billion. The banks involved will agree to the settlement, and the government will in turn give them immunity going forward from further financial culpability for the 2008-2009 mortgage crisis.

I believe this settlement will be announced in the next five weeks.

What proof do I have?

I was recently emailed  a set of working papers from a Congressional Budget Office analyst.

The paper is careful to say it is the author's opinions and not the CBO's, but the main thrust is this: The report assumes an additional 2.9 million mortgages to be refinanced, resulting in 111,000 fewer defaults on those loans and resulting in savings for the Fannie Mae and Freddie Mac of $3.9 billion on their credit guarantee exposure, measured on a fair-value basis.

Offsetting those savings, federal investors in mortgage-backed securities, including the Federal Reserve, the government-sponsored enterprises, and the Treasury, would experience a loss of $4.5 billion (also on a fair-value basis). The net federal cost would be an estimated $0.6 billion.

From the borrowers’ perspective, savings from lower mortgage payments is projected to total $7.4 billion in the first year of the program. The associated effect on consumption would decline significantly over time as borrowers pay off those loans.

Of course, the people who own these mortgage-backed securities, including banks and private investors, will have to find alternative investments.

However, if this refinancing program was undertaken, it would cause increased yield curve protection for everyone investing in the mortgage market, which would move up the 10-year and 30-year treasury bonds.

Fed Chair Ben Bernanke announced Operation Twist this week, which means that the Fed will sell short-term Treasury bonds and instead buy longer-terms coupons, which would neutralize the effects of the massive refinancing.

How possible is it that, with a presidential election coming up, that almost three million homeowners will see lower monthly payments, while 'net savers" and investors will be forced to find alternative investments that provide income?

And now you see why I advocate the purchase of conservative dividend stocks instead of bonds and money markets!

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