Browsing the internet this morning I came across an interesting thread on the White House pushing for 0% mortgage rates for refinancing homeowners. Although this rumor is surley dead in the water many are commenting on the possibilities for Zero percent mortgage rates.
“. People need to write down the principal of these overvalued assets and no one wants to take the loss.”
“I worked at a community bank for awhile, I can’t imagine how we could have made a profit by lending money at 0%. Forget profit, how we could have paid for anyone’s salaries, etc. Unless, of course, the government will pay banks to take the money. Hmmm…they tried that once, and called it TARP. But along with the “free” money came lots of government control and intervention. Or they’re generating substantial fees, but the current mindset in D. C. seems to be against that.”
“What I’m saying is that the homeowners will lose the EITC as part of the deal. D.C. has been trying to get rid of it for a while.”
From www.zerohedge.com
Incidentally, even if the rumor was true, here is JMP explaining why it would have no real impact on Bank of America
Bank of America (BAC, $6.28, Market Perform): Market Overly Optimistic About the Impact of a Hypothetical $1 Tril. Refinance Program, in Our ViewShares of BAC were up 8% today as rumors swirled that President Obama may enact a $1 trillion refinance program. Granted, BAC shares were trading at a big discount to book (0.4x), and the investment community–now with several months of runway–seems to be going “risk on”. But the big upward move on this news seems more a grasp for “validation”, and we don’t believe it will stick.
We must point out that BAC is up big, while JPM and Citi are only up with the broader bank index. This suggests that the market is focused on the mortgage-loss exposure specifically as this is uniquely troubling at BAC. Were the market focused on the big potential one-time benefits of mortgage production fees (in our view, the lone positive), they would all be up big, but this is not the case. Meanwhile, servicing revenue should obviously be a zero-sum game.
Thus, we focus our discussion on the loss exposure. The key risk to BAC is the looming threat of material mortgage putbacks (reps and warranties). These are not new losses but losses already locked in and incurred by others that are merely redistributed to BAC retroactively via the legal system. No refinance program will undo these losses for which, in most cases, the foreclosure has been completed.
As for the matter of avoiding new losses by saving currently wobbly homeowners, we question the efficiacy of a refinance program when the key issue is jobs–where the homeowner has no income nor liquid asset buffer, a lower payment isn’t going to matter. More generally, as we have seen with prior attempts, these programs are more about kicking the can down the road, so it’s more about delaying future losses than avoiding them altogether.
Many homeowners could already materially lower their payment (or avoid a looming balloon) via refinancing but can’t do so because of the LTV. Thus, we presume any big refinance program would have to include the U.S. government providing mortgage insurance to the lenders/investors, which creates incremental risk for the U.S.
Appears to be another internet rumor.
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