President Obama's State of the Union address included a section on refinancing initiatives that will strike a chord with mortgage investors, a Barclays Capital report said.
In the State of the Union address on Tuesday evening, the president pledged to send Congress "a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won't add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust."
What the program will look like is still unclear but the Barclays' report noted that further details are expected in the coming days.
"Initial indications from the media seem to suggest that this program will seek to make the refinancing process as streamlined as possible," the report noted. "Furthermore, it appears that this program would be aimed not only at borrowers whose loans are owned by the GSEs, but also non-agency loans as well. Potential options could utilize the GSEs or the [Federal Housing Administration] to facilitate such a program. In addition, large financial institutions would be taxed to fund the program."
The Federal Reserve earlier this month released a white paper on potential measures to strengthen housing. The Fed also noted ways to boost refinancing activity and among the suggestions noted in the paper were a push for a comprehensive reduction of putback risk, streamlining and harmonizing the refinancing process for borrowers with LTVs less than 80% and the expansion of HARP eligibility to loans outside of the GSE scope.
According to the Barclays report, at least one aspect of the suggestion be worked out without Congressional approval. For existing agency borrowers,, the government – through the GSEs – can announce a blanket one-time waiver of reps and warranties for agency-backed loans that banks refinanced, analysts noted in the report.
"Banks would be only too happy to get out of the putback risk and would aggressively refi the borrowers they can," they said. "This does not need Congressional approval, just a regulatory decision."
Barclays also said that while the GSEs stand to lose economically by giving up the putback option, that loss could be offset by charging a fee on each refinanced loan (as opposed to a fee on the banks themselves).
This fee, explained the report, would be passed on to the borrower and the form of a somewhat higher rate. Here too, the Barclays analysts noted, that no Congressional approval is needed.
Still while much of the refinancing program may not necessarily require a Congressional blessing, the analysts noted that the Obama Administration may be looking to get a bill passed "to defuse the political risk by pushing Congress to take partial ownership" of the decision for the GSEs to do a blanket waiver of reps and warrants on refinanced loans.
The president also proposed a tax on banks in his State of the Union address that would be administered via a new bill. The tax would pay for the economic cost of the refinancing. "It could be compensation for the government taking on new credit risk in the form of existing non-agency borrowers being refinanced, compensation for GSE rep and warranty waivers, or to make sure borrowers are absolved of the upfront cost of refinancing (these costs are now a significant deterrent to refis)."
For private mortgage investors, the lower rate and the long maturity of the refinanced bonds may prove unattractive. According to Barclays, these refinanced mortgage loans will probably end up getting sold into a 3% MBS.
"But these will be extraordinarily long bonds, since the loans are being created through a one-time extraordinary policy action," analysts said in the report. "Many of these borrowers will find it difficult to refinance again, given how low the rate is and the manner in which they obtained the interest rate. Private investors will probably balk at buying these loans."
