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Chris Mayer
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Having attended this conference, Andreas and David have done a great job summarizing the comments and ideas. Their paper is excellent. However, I should express a belief that regulation and higher costs and risks play a bigger role in explaining the growth of this spread than is commonly perceived. One key observation: capacity is constrained not just because lenders are not investing more in capacity, but some large lenders are actually shrinking their mortgage origination capacity. Reducing capacity is inconsistent with higher risk adjusted profits. At least some lenders are choosing to reduce capacity despite seemingly higher profit margins. Regulators could do more to be sure there is greater certainty about putback risk, for example. A candid conversation with lenders who are voluntarily shrinking capacity might generate additional observations. As well, neither the GSEs nor FHFA has credibly explained why they continue to leave barriers in place to competitive refis...instead these parties seem to argue that there aren't barriers to different servicer refis despite the evidence to the contrary in this paper.
Thanks, Katie. The payments to servicers in our program would occur only after the refinancing is completed. One would clearly want to set the right fee so that you make it in the interests of servicers to do this, but not provide a windfall. For servicers, this would be a win, as they get the same servicing fee whether or not there is a modification or foreclosure. So lower payments mean fewer defaults, so servicers should like the program. That isn't the goal, obviously, helping homeowners is the goal, but it increases the likelihood that servicers make it work, In my view servicers have been a problem in this crisis, but part of the reason is that we have not tied their compensation closely enough to performance. In this case, performance is keeping people in their homes and current on their mortgages. My original proposal to deal with foreclosures in early 2009 (with Ed Morrison and Tomek Piskorski) strongly emphasized this point. In our proposal, payments to servicers only happened when homeowners were in their homes paying their mortgage. That is a strong incentive to make modifications work. That said, we should also observe that HAMP requires a lot of unneeded checks and bureaucracy that have made it difficult to implement even for servicers who really tried hard. Our program is designed to avoid that problem. The link below takes you to a summary of my previous writings on the crisis with various collaborators, including this proposal: -Chris
Hi Adam and others- Thanks a lot for your comments. As you can see, I have posted a response on Jean's line, so I won't repeat our conversations there. You highlight several important issues that are impairing the process. Understand that in an op-ed we do not have unlimited space to go thru details of how we got here and why this is the best solution. But we are happy to take on those issues in this format or elsewhere. I would not say that our proposal is naive, however. It addresses an enormous number of practical complexities. We have a posted description of our proposal and an FAQ ( I agree that it is unconscionable that the GSEs as wards of the taxpayers are not doing everything possible to help refinancings. They are trying to mark up the price of refinanced loans because they say that these loans are risky; but they already bear the risk, so turning down the refinancings is bad business, not just bad policy. Under conservatorship, they are supposed to do any program that would increase their profits. I do not see how they can argue that expanded refinancing is not in their business interest. (See more in my blog posting for Jean). For new housing credit, the US government is the only game in town. The GSEs or FHA are originating more than 19 out of every 20 new mortgages. So any proposal that is going to work in the short-run in providing new credit is likely to come from the US government. The GSEs should be actively taking steps to reduce costs imposed by servicers (their fees have gone from 20 basis points up to 90 basis points). Once again, charging such high fees is unacceptable and needs to be addressed with policy. As well, title companies charge a large amount to refinance a mortgage, when their risks do not change. Again, this can and should be fixed. We must take aggressive action to help housing and homeowners. This proposal does not take on all the problems (privately securitized mortgages, underwater second liens, and bank mortgages), but it addresses about 2/3 of all outstanding mortgages. We have not seen any better ideas coming out of DC. Now is a good time to take some action to help the economy and middle class Americans, while reducing costs of the GSE bailout for taxpayers. -Chris Mayer
Hi Jean (and others)- Thanks a lot for your comments and insights. As we envision this plan (and as you suggest), there would be no role for servicers approving anything; ALL borrowers would be approved. This is a critical part of the process. It has to be streamlined. Other commentators have suggested similar programs to help refinancing that focus only on reducing costs of refinancing. We believe that is not enough. Our plan is very aggressive in this regard. Second, the failures of HAMP are a prime consideration in our proposal. Avoiding costs of refinancing and removing discretion from the process should make this program much more successful at modifying mortgages. While I agree that we need to do much more (e.g., helping those with bank portfolio loans or bank loans), no single proposal can solve all problems in this market. But helping 2/3 of all mortgages is a really great and ambitious start. Ed Morrison, Tomek Piskorski and I have made policy proposals and done research aimed at trying to help reduce foreclosures. A key part of this is trying to do things in scale. Time is against us here. Third, the computations about the cost to taxpayers is complicated. We are now doing these calculations in more detail, but believe the balance of payments will cut in favor of this proposal. We believe that any possible losses on MBS held by the government should be more than offset by lower costs of future defaults for the GSEs. First, having fewer defaults and foreclosures will lower guarantee costs. Lowering mortgage costs will not only reduce defaults on American hammered by the recession, it will also reduce strategic defaults. While strategic defaulters will not get help under any existing programs, they still cost us, as taxpayers, lots of money. Second, as you point out, there is a partial offset through reduced mortgage interest deductions (this is complicated by lost taxes from investors on the other side). But since appreciable numbers of securities held overseas, we believe that the net effect will benefit taxpayers. Even if it were a close call, the macroeconomic impact of $50 billion or more of additional income to middle class Americans should generate more than enough economic activity to help ordinary Americans and taxpayers. Once again, we appreciate your feedback. We hope this is a proposal that can get support across the political spectrum. Comments can help refine this. But the status quo is not a good place to be. -Chris Mayer
We wanted to respond to the helpful comments on our proposal with a couple of clarifications. First, the proposal would not cost taxpayers any money and does not involve a bailout of any kind. This program would apply only to GOVERNMENT GUARANTEED mortgages, for which we, as taxpayers, are already bearing all of the costs for poorly underwritten mortgages. (Think of the multi-billion dollar requests every quarter from Fannie Mae and Freddie Mac from the taxpayer.) Allowing homeowners to refinance would lower mortgage payments for 37 million households, with the benefits going to conforming mortgage borrowers--relatively responsible borrowers. Second, our proposal would limit the discretion of servicers. Servicers must run any program, but ours would be directed by the Treasury Department and would require compliance. Having the program be comprehensive helps ensure that the bulk of borrowers are able to take advantage of it. We appreciate your feedback and are happy to learn more about ideas or objections.
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Sep 20, 2010