Posts Tagged ‘Federal Reserve Bank of New York’

Obama Bypasses Congress to Boost Housing

Monday, October 31st, 2011

President Barack Obama executed an end run around Congress when he announced a significant retooling of a plan designed to help homeowners who are paying their mortgages, but still underwater, refinance their loans at a more affordable interest rate.  Administration officials said the changes will streamline the government’s Home Affordable Refinance Program (HARP) and could dramatically increase the number of borrowers who have refinanced their loans under the program past the current 894,000.  They did not specify how many borrowers might be eligible or likely to participate.  The program, which is voluntary to lenders, will be available only to homeowners whose mortgages were sold to Fannie Mae and Freddie Mac on or before May 31, 2009, and who have a loan-to-value ratio above 80 percent.

The downside is that hundreds of thousands more could not qualify — primarily because of the previous 125 percent loan-to-value limit on the program or because banks refused to take on the risk.  Raising the loan-to-value restrictions may help a limited number of borrowers, according to Jaret Seiberg, an analyst for MF Global Inc.’s Washington Research Group, which analyzes public policy for institutional investors.  The difficulty is that mortgage holders still must be up-to-date on their payments for the past six months — with no more than one missed payment in the past year.  Additionally, they also must qualify for a new loan.

Qualifying homeowners will be able to refinance their mortgages at the current low rates, which are currently near four percent. Obama’s move comes at a time when there is a fast-growing consensus that the nation’s declining housing market is negatively impacting the economic recovery.  Home values are at eight-year lows; and more than 10 million people are underwater, meaning that they owe more than their homes are worth.  “It’s a painful burden for middle-class families,” Obama said.  “And it’s a drag on our economy.”  The administration’s proposal underscores the scale of the problem, as well as the limits of public policy in resolving it.  By cutting monthly payments, the Obama administration hopes to make cash available for consumers to spend elsewhere.

According to housing regulators, one million borrowers might be eligible to participate in the program.  Unfortunately, that is just 10 percent of the number of homeowners who need help.  Although the Obama administration’s estimates say the average homeowner could save $2,500 per year, other projections said savings would be in the range of $312 annually.  This depends on the upfront fees the borrower pays, which can include thousands of dollars in closing costs.

Obama promoted the plan under his “We Can’t Wait” campaign, in which he will use the executive branch’s existing tools to improve the economy while Congress debates further legislation.  “We can’t wait for an increasingly dysfunctional Congress to do its job,” he said.  “Where they won’t act, I will.”

“We know there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach,” said Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), which administers Fannie Mae and Freddie Mac. The program expires at the end of 2013.  “We believe these changes will make it easier for more people to refinance their mortgage,” DeMarco said.  “Breaking this vicious cycle is one of the most pressing issues facing policy makers,” Federal Reserve Bank of New York President William C. Dudley said.  The HARP revamp is part of multiple efforts the government is making to boost home prices and consumer spending.  “It’s the equivalent of a tax cut for these families,” HUD’s Donovan said.

Mortgage lenders are “particularly gratified” at the revised plan, said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association.  “These changes alone should encourage lenders to more actively participate.”

Writing in The Atlantic, Daniel Indiviglio believes that the revised program has potential.  “The administration appears to have accounted for all of the major obstacles to refinancing and eliminated them.  A home’s value no longer matters.  The cost should be less prohibitive to borrowers.  Much legal red tape has been cut.  Other loans tied to the home won’t stand in the way.  Ample time to refinance is provided.  This should help to allow at least a million Americans to refinance who haven’t had the opportunity to do so in the past.  If this works as hoped, then those consumers will have more money in their pockets each month.  Borrowers who see their mortgage interest rates drop from five percent or six percent to near four percent will often have a few hundred dollars more per month to spend or save.  If they spend that money, then it will stimulate the economy and create jobs.  If they save it or pay down their current debt, then their personal balance sheets will be healthier sooner and their spending will rise sooner than it would have otherwise.  The effort may even prevent some strategic defaults, as underwater borrowers won’t feel as bad about their mortgages if their payment is reduced significantly,” Indiviglio said.

Felix Salmon, writing in Reuters, could not disagree more. “For many reasons, it is very difficult to project the number of mortgages that may be refinanced under the enhancements to HARP, including the future path of interest rates, borrower willingness to undertake a refinance transaction and the number of lenders and servicers who choose to offer the program.  Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.  First, by the end of 2013?  Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time?  Secondly, the current pace of HARP refinancing is pathetic.  We’ve been managing to do less than 30,000 HARP refinancing a month.  And in the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancing, which works out to about 32,000 per month.  The FHFA is projecting that the pace of HARP refinancing won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.”

AIG Repays Another $2 Billion in TARP Money

Thursday, September 8th, 2011

The Treasury Department is laughing all the way to the bank. Insurance Giant AIG repaid $2.15 billion that it had borrowed through the Troubled Asset Relief Program (TARP).  In 2008, the government helped the giant get back on its feet with a $180 billion loan.  AIG has been gradually repaying the money.  The most recent repayment is the result of the sale of AIG’s Taiwan-based subsidiary Nan Shan Life Insurance Company. One of AIG’s strategies for cutting its debt has been to raise funds by selling assets.  “We continue to make progress in helping the Treasury and taxpayers recoup their investment in AIG,” according to AIG CEO Robert Benmosche.

Not surprisingly, the Treasury Department is pleased with the transaction.  “This is another important milestone in AIG’s remarkable turnaround,” Tim Massad, the assistant secretary for financial stability, said in a statement. “We continue to make progress in recovering the taxpayers’ investments in AIG.”  AIG still owes Treasury $51 billion.  TARP legislation was passed by Congress in late 2008 to rescue the financial sector, which was on the verge of collapse.

Benmosche is still weighing whether to retain a stake in AIA Group Ltd. while repaying TARP funds. AIG sold 67 percent of Hong Kong-based AIA last year in an IPO that raised $20.5 billion. The remaining interest added $1.52 billion to AIG’s second-quarter profit as the Asian insurer’s stock price surged. AIA has soared 19 percent this year and is the number one gainer in the 73-company Bloomberg World Insurance Index. “It’s been a great investment, so they may want to hold onto it,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP.

Now that the Nan Shan deal has closed, AIG’s final significant disposal will be International Lease Finance Corporation, or ILFC, which purchases airplanes to lease them to airlines.  The company is considering an initial public offering (IPO) for ILFC later this year.  Using Nan Shan proceeds to repay the special purpose vehicle gives AIG “more flexibility as to what to do with ILFC and other assets, too.  It adds in general to their cash-flow flexibility.”  He is telling his clients to buy AIG stock.  Treasury holds a $9.3 billion preferred interest in the special-purpose vehicle after accepting proceeds from the Nan Shan sale, according to AIG.  Benmosche may delay or forego selling AIA shares.  AIG’s agreement with underwriters lets Benmosche reduce or hedged the stake in October.  “We’re looking potentially at monetizing other assets that we have so that AIA might be sold much later on, if at all,” he said.

Writing in The Hill, Peter Schroeder says that “In many ways, AIG came to serve as a symbol of much of the public’s anger over the bailout, as it found itself at the center of the historic financial crisis and reliant on substantial government support.  That dissatisfaction came to a head in 2009, when executives at the company planned to distribute hundreds of millions of dollars in bonuses after billions in losses during the financial crisis.  In January, AIG completely repaid the Federal Reserve Bank of New York with a $47 billion payment, and the Treasury in May agreed to sell 200 million shares of AIG stock, raising nearly $9 billion in that offering.  The latest payback from AIG means the Treasury has recovered $313 billion of the investments it made under the Troubled Asset Relief Program (TARP) — roughly three-quarters of the $412 billion it originally dished out to keep the financial system afloat.  The Treasury announced in March that it had officially turned a profit on the bank portion of TARP.  It followed that up with a July announcement that it had exited its investment in Chrysler, ahead of schedule but losing about $1.3 billion in the process.”

On the Huffington Post, Jason Linkins has a cynical take on AIG’s recent repayment of TARP money. “Okay, I’m just going to stop it right there, because when it comes to ‘AIG’s remarkable turnaround,’ the devil is in the details.  Time and time again we’re asked to celebrate the success of TARP.  Back in March, the good news was that, ‘The Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers.’  But this profit that the government has turned on the bailout of AIG rings pretty hollow in light of the four different restructurings of the original agreement that the government has acquiesced to since the fall of 2008.

“When the Fed first stepped in to prevent AIG from collapse in September 2008, the deal was actually pretty good — it carried a punitively-high interest rate appropriate for a bailout, the CEO was dismissed and the company was going to sell itself off in parts, ending its too-big-to-fail status.  If the government were turning a profit on a deal like this, it would indeed be good news.  The trouble is, AIG’s new management didn’t break up the company very quickly.  And even as it paid out lavish bonuses to its top-performing traders and executives, it couldn’t make good on its interest payments to the government.  So the feds stepped in again — and again, and again — throwing more money at the company, reducing the interest that it would pay taxpayers and eventually converting the government’s loans to common stock, abandoning concrete repayment obligations in favor of whatever the stock might someday be worth.”

Government Investigating Possible Law Violations in Foreclosure Crisis

Thursday, November 11th, 2010

 Feds are investigating foreclosure irregularities, searching for possible law violations.  The Department of Justice has opened an investigation to determine whether banks and other financial institutions broke federal law by using deceptive court documents to foreclose on homes.  Although the investigation is just underway, it will probe whether companies deceived federal housing agencies like Fannie Mae and Freddie Mac, which currently insure a large percentage of American homes.  The investigation will also examine whether firms committed wire or mail fraud in filing false documents.

The probe is intended to send the message that banks will be held accountable for illegal foreclosures.  President Barack Obama’s Financial Fraud Enforcement Task Force is also taking a look at the foreclosure mess.  “In more than 25 years dealing with major financial crisis issues, I have never seen this many agencies focused on a single issue,” said Andrew Sandler, an attorney who specializes in government investigations.  “We are beginning to see signs of extensive governmental investigation that may also have criminal law implications.”

With reports that big banks filed court documents without proper review, federal investigators want to know if similar paperwork was submitted to housing agencies to collect insurance payouts.  Bank employees have admitted to signing documents without reading them.  If similar filings occurred at the governmental agencies, that action could constitute a violation of United States law.  Although the investigation so far has no specific target, it could center on banks, independent mortgage servicers, law firms and other companies involved in the foreclosure process.  Shaun Donovan, Department of Housing and Urban Development Secretary, is working with other regulators to assure that all foreclosures are legal.  “We are working closely with others in the administration, as well as independent regulators and law enforcement agencies, in insuring that no one loses their home as a result of a mistake or criminal behavior,” Donovan said.