Not So Angelic

Housing is considered by many economists to be at the very heart of America’s current economic problems.  Values have fallen, leading to defaults, repossessions, and owners struggling to make payments on mortgages well in excess of equity.  Not willing to follow Greenspan’s suggestion that the government should buy up the excess inventory and burn it, Obama’s administration unveiled HARP (Home Affordable Refinance Program) in March of ’09.  It was designed to allow mortgages to be guaranteed by both Fannie Mae and Freddie Mac for amounts up to 125% of a home’s value in an attempt to let owners who are making payments refinance at a lower rate, thereby lowering their monthly mortgage and giving them more incentive not to send the keys back to the bank.

HARP hasn’t produced results anywhere close to those anticipated for a variety of reasons.  One in particular caught our attention.  Securitization, the practice of bundling mortgages together to provide banks a convenient way to sell these financial products, has given the buyers of these securities paper pegged to interest rates much higher than any available today.  Refinancing them would return the principle to these buyers, forcing them to reinvest the proceeds elsewhere at today’s lower rates.  The home owner might keep his house, but the lender would lose interest.

Who are these lenders that seem to have lost interest in playing the HARP?  Big institutional investors, according to a recent Bloomberg report, own most of these securities and also comprise the most important customers Fannie and Freddie have.   Some staff members there worry that these folks would lose too much if the plan was broadly implemented.  Others, including some senior officials, reportedly are seeking ways to make the plan viable, resisting suggestions that would reduce its efficacy while benefitting lenders at the possible expense of home owners.  Of course, two of the big institutions which would lose out if higher-rate mortgages were refinanced are the Treasury Department and the Federal Reserve.  In other words, refinancing could cost you, the tax payer.  How angelic does that make you feel?