Obama Pulls The Trigger On The January Surprise

I told you so. This was the housing policy bombshell from President Barack Obama’s State of the Union address:

And while Government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief. That’s why I’m sending this 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.

Thunderbolt. A mass mortgage refinancing plan with a new bank tax to pay for it. Obama’s description is sketchy, but here’s how ace analyst Jaret Seiberg of Guggenheim Washington Research Group sees this new plan playing out:

 The President is pushing an easy-to-execute plan to let borrowers refinance mortgages regardless of LTV. This is a much bolder initiative than expected, though we emphasise that it is a legislative proposal that cannot take effect unless Congress enacts it. Were this enacted into law, this would be a mass refinancing that we believe could help more than 10 million borrowers refinance their mortgages regardless of whether their loan is backed by the government or not. …

Hurt by a mass refinancing would be holders of MBS that is trading above par as prepayment rates would accelerate materially. … Our concern is that a mass refinancing could permanently drive housing finance costs higher. This is a real threat as investors are likely to demand a premium if government policy materially accelerates prepayment rates. … Our view is that only borrowers who have been current on their loans for at least six months – or possibly a year – will be eligible for the program. In other words, this is meant for borrowers who can afford their mortgages. It is not a mortgage modification initiative.

And CNBC describes it thusly:

The Obama administration is offering precious few details, promising more in the coming weeks, but several sources say the plan is to ask Congress to allow the government mortgage insurer, the Federal Housing Administration (FHA), to back refinances of underwater mortgages. No estimates were given as to how many borrowers such a plan could potentially help, only that this would be a voluntary, borrower-initiated plan, and not a blanket refinance of all borrowers. The costs, according to administration officials, would be modest, and the President would request that a portion of his financial crisis responsibility fee offset any of those costs, so there would be no addition to the federal debt.

And here’s what I wrote in early January:

 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. … 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 … 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.

And the economic impact? Well, 10 million borrowers saving $3,000 a year equals $30 billion a year in reduced mortgage payments. But the added lift to the economy could, conservatively, be closer to $40 billion a year initially. (I am using calculations based on the impact of the Hubbard-Mayer plan I described in my original post.)

But surely questions will be raised if the FHA is the vehicle. As AEI’s Ed Pinto explains,  the FHA’s  capital position using private-industry standards shows the FHA to be deeply insolvent. The FHA is estimated to have a current net worth of –$17 billion and an estimated capital shortfall of $35–53 billion. Private regulators would shut it down rather than continuing to allow it to “grow” its way out of its insolvency. Republicans will have lots of questions and may balk if this smells like a moral hazard-inducing housing bailout. (It is just this sort of thing that launched the Tea Party movement, after all.)  Then there’s the bank tax to deal with. This SOTU shocker may well be the talk of the markets today. Hopefully more details to come and soon …