Mortgage Refi ‘Hype’ Overstates Talks, Ginnie’s Tozer Says
Speculation that U.S. policy makers will loosen refinancing rules for government-backed mortgages to aid the economy is “getting way ahead of itself,” Ginnie Mae President Ted Tozer said.
“It’s really disconcerting to hear all this hype that something is imminent and that that’s something the markets are trading off,” said Tozer, whose government-owned corporation guarantees more than $1 trillion of mortgage-backed securities.
President Barack Obama’s administration is taking into account the potential “repercussions,” as officials consider ways to aid consumers by stoking refinancing of debt insured by Fannie Mae (FNMA), Freddie Mac or the Federal Housing Administration, Tozer said, based on discussions he’s had with them. The speculation is “getting way ahead of itself, because at this point, it’s all just research,” he said yesterday during an interview at Bloomberg News headquarters in New York.
The $5.3 trillion market of securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, whose bonds are composed mostly of FHA loans, slumped last month by the most relative to U.S. Treasuries since after Lehman Brothers Holding Inc.’s collapse, in part because of concern the U.S. will seek to expand refinancing after loan rates fell to a record low 4.15 percent.
The housing debt, known as agency mortgage securities, underperformed similar-duration U.S. government notes by 0.9 percentage point, the most since October 2008, according to Barclays Capital index data. The average price reached a record 108.6 cents on the dollar on Aug. 10, before retreating to 107.7 cents yesterday, Bank of America Merrill Lynch index data show.
Mortgage-bond holders are damaged by refinancing when they buy or own debt trading for more than face value, because their money gets returned at par and they lose out on interest. A broad refinancing program could reduce the attractiveness of a market that helps finance more than 90 percent of new lending.
“People in the administration I’ve talked to understand the context of walking the fine line of trying to help the economy, without hurting the housing-finance system in the future,” said Tozer. “They know there’s no silver bullet, they know everything has repercussions, everything has a downside. The administration is really conscientious. They’re thoughtful people.”
Lenders’ ability to sell new mortgage bonds for more than their face value helps consumers because it means that banks can use higher interest rates to cover their expenses and third-party closing costs without charging fees, said Tozer, who spent more than 20 years at National City Corp.’s mortgage unit before taking his current job last year at Ginnie Mae. The agency is formally known as the Government National Mortgage Association.
While the administration will probably make changes to its Home Affordable Refinance Program, the tweaks may be limited and less effective than they appear, according to analysts including Amherst Securities Group LP’s Laurie Goodman. That’s because some potential moves would be costly for government-supported Fannie Mae and Freddie Mac or difficult to implement, she said.
“While we believe a universal refinancing program is unlikely, it is clear the HARP program has reached far fewer people than hoped,” Goodman wrote yesterday in a report. “We would expect to see measures to increase the effectiveness.”
The program was introduced in 2009 and has been used on about 840,000 loans, less than the administration’s initial forecast of 4 million to 5 million. HARP is meant to help borrowers who have been making on-time payments refinance even if they have little or no equity in their homes.
Changes last month to FHA and Ginnie Mae loan-modification rules show compromises are possible that take the interests of consumers and investors into consideration, Tozer said.
To help investors, Ginnie Mae wanted to limit the amount of delinquent borrowers with loans that were quickly defaulting after being taken out of its securities, modified and then placed into new bonds. It went to the FHA with the idea of requiring borrowers with reworked debt to go through three-month trials before the modifications became official, he said.
The FHA, which also wanted to reduce re-default rates of more than 50 percent, in response sought to create more modifications among borrowers who weren’t yet delinquent, he said. Bondholders could be damaged by the wider pool of loans servicers would buy out of securities at face value to rework.
The result was rules that will allow more homeowners who haven’t yet defaulted to get lower payments, including those who have “net surplus income of less than 20 percent of total net income,” according to an Aug. 15 notice. The modification trials, which will leave loans within bonds until consumers complete them or fail and reach foreclosure, are also being required.
Ginnie Mae won’t tolerate servicers using the changes to lower rates for consumers who haven’t experienced hardship and could use a typical refinance, Tozer said. “From our perspective it would be abusive to the spirit of the program,” he said.
To contact the reporters on this story: Jody Shenn in New York at firstname.lastname@example.org.