Shortly before Obama's jobs speech I posted that it should include a Mortgage Refinancing program. What actually happened was a 15 second reference in the speech to working with the FHFA to facilitate more refinancing. The next day a CBO report, a generic study of refinance obviously on-going before O's speech, underwhelmed the entire idea of Refinance, particularly in scope and possible stimulative effect. Others stated in the Senate Housing Subcommittee hearing two days ago that the CBO's "take-up" estimates of 2.9 million borrowers were far too conservative.

The fact is that the existing stakeholders in the mortgage mess constitute a circular firing squad, each entity trying to maximize its own agenda against the interests of others. Until a consensus is formed which balances all of the interests, including tax payers and borrowers, any movement in mortgage refinance is going to be limited. Leadership from Obama is essential, but so also is action from Congress. Here are some of the stakeholders, their positions and some other facts.  

Industry groups like Mortgage Bankers Assoc. and National Assoc. of Realtors. They support the Boxer bill to allow 2 million underwater borrowers to refinance at lower rates.(so does PIMCO)

Investors in MBS's. An assortment including the GSE's, the Fed, the Treasury, Banks, Investors such as Pimco--plus we taxpayer stakeholders in existing MBS's held by the    GSE's--will take a haircut in any mortgage refinance program. In other words, the interest income will be lower. Republicans are not going to change their stance of protecting "Investors" nor their concerns about how a wave of mortgage refinancing might tank the entire MBS market without getting something in return.

Banks, esp. the big 4. Banks are concerned that refinance will expose additional bad origination or servicing practices. Also, they don't want their interest income reduced. Also they hold a half Trillion dollars in second mortgages--many related to underwater primary loans. Generally you can't refinance a primary without agreement of the second lien holder to re-subordinate the second.

Also, with respect to banks, any effort to get a large scale mortgage program of any kind implemented begs the question of: who actually is large enough to do it? The banks of course. And more importantly, who gets the liability of the newly refinanced mortgage--that is, who wants to jump out of the frying pan into the fire. Also, being under such pressure on the legal front, including suits by the FHFA itself, do banks have an incentive to do anything if they can't also get a deal reducing some of their legal liabilities? Most serious proposers of any Refinance program realize that in order to get the broad cooperation of banks, the liabilities for "reps and warranties" on the refinanced loans would have to be waived.

FHFA. The issue of forgiving reps and warranties leads to the mission and current actions of the FHFA. First, they have just sued all of the banks who might be the implementers of a refinance program. To the extent the FHHA releases the refinancing banks from reps and warranties liabilities they weaken their own objectives in the existing law suits.

More importantly, the charter of the FHFA is to prevent the GSE's from losing any more money and not paying taxpayers back the rest of the $150B which is owed. Refinancing not only lowers income but might simply shift liability from the originator back to the GSE's. Not to mention that the purpose of the FHFA is to wind down the GSE's in their current form and a major refinance program program would actually extend their existence. Not to complain, but Geithner is more interested in being the Administration's Ambassador to CNBC and instructing Old Europe in the mysteries of TARP than coming to grips with whether the GSE's should be wound down or wound up in the service of a refinance program--not that his opinion has any sway with the FHFA head, Ed DeMarco.

Mortgage insurers. In a word, they have to go along with re-insuring the mortgage. No clear indication they will do this.

And all of the above is just the tip of the iceberg in terms of dozens of competing lawsuits, not to mention the cold climate of the Congress as well as the Super Committee.

The reality of Mortgage Refinance is that most of the things which heretofore have limited the effectiveness of HAMP and HARP--most importantly bank resistance and GSE's high lending standards and high fees--are still present and so far nothing has changed. Ed DeMarco, head of FHFA, is not to be pushed around by Obama or the Congress. If his mission isn't changed by Congress, not much new is going to happen there.

Having said all of the above, there is still hope that personal persuasion of DeMarco by Obama may get some relief around the edges. Or industry groups may have enough clout with Republicans in Congress to pass the Boxer bill giving FHFA some new orders-- but Republicans are going to be asking for a lot in return. (Would any of us want to let the banksters off the hook to gain some small relief for homeowners?) The argument that the fiduciary duties of FHFA to taxpayers should perhaps include the "common good" in helping 25 million borrowers refinance to lower interest rates has not been framed or presented to the public.   

Many of the other mortgage initiatives, like equity sharing or allowing owners to stay in their houses, face the same issues as contained in refinancing programs, with the added problems of actually modifying the principal. Perhaps such programs will help a little. But overall, a solution to the mortgage mess at this late date and with the Congress against it is just that--hope. I hope I will be proven wrong, maybe there will be a breakthrough.

I continue to be fascinated by the refinance program being offered by a group related to the Absalon Project (partly financed by Soros) and which includes R. Glenn Hubbard. The projections here are in fact huge--25 million mortgages refinanced and a huge stimulus. (One of the authors of the huge refinance plan, Christopher Mayer, testified in the Senate hearing on Wednesday). To think that a settlement like it could be reached before the election seems also to be wishful thinking. By the way, R.Glenn Hubbard is an advisor to the Romney campaign.

Barton Biggs, a name in the investment community, suggested jokingly that the Fed should just buy up houses.

As reported by MSNBC's "Ed" in Toledo, a Chinese firm just purchased a mall, that originally consumed $42 million in city subsidies, for $3 million. Maybe China would like to do some new lending to our underwater homeowners.

Then there is a bi-partisan bill on "Covered Bonds" working it's way through Congress. It would replace MBS's as a financing tool. Problem--it looks like a more expensive MBS with not much of the downside removed. However fixing the mortgage mess is a choice among least worst outcomes. Maybe covered bonds are an outlier solution in some kind of end-run around stymied MBS's.

So, we will get some refinance action of some kind as an adjunct to the jobs plan. But the CBO estimate, $7B in stimulus from 2.9 million mortgages, pales in comparison to the overall jobs bill. It's sad, really, because housing refinance could help so many people. And for once we should just say to hell with the numbers, it might just be good for everybody's confidence level to see borrowers get a break for a change, instead of the banksters and "investors".

I wish this analysis had turned out differently and my initial optimism could be confirmed. But at the moment I don't see a way to disarm the circular firing squad. Without some major disarmament of the competing parties, it's wishful thinking to suggest that mortgage refinance will have a large near term effect on the economy and jobs.

Update: Sept 19. DeMarco made it clear today that unless Congress changes his mandate, he is not going to be part of a major refinance program. He stated that he is actually going to increase fees.