Must-know: Mortgage reform and the future of housing finance (Part 2 of 5)
What the right wants
For the political right, the goal is to encourage private capital to return to the market and lower the government’s footprint in housing. For them, the goal is to “crowd in” private capital, and that means the historical underpricing of mortgage insurance (basically, a subsidy) had to be corrected. The biggest priority was to let the markets clear, protect the taxpayer, euthanize Fannie Mae and Fred Mac, and set the stage for private capital to do the heavy lifting of mortgage finance. Many on the right viewed the governmental social engineering as a fool’s errand and ultimately one of the causes of the housing bubble.
What the left wants
The left wants FHFA to concentrate its focus on helping homeowners in distress through mortgage modifications. They want the agency to do whatever it can to prevent foreclosures. The government also pressured servicers like Nationstar (NSM) and Ocwen (OCN) to modify mortgages to the extent possible. Where this really came to a head was the issue of what to do with mortgages held by Fannie and Fred. The left wanted to see a massive principal forgiveness on these mortgages. The left was instrumental in the removal of Ed DeMarco from leading FHFA. The reason they wanted him gone was his refusal to do principal mods on mortgages FHFA held. The left-wing opinion is that banks got bailed out but homeowners, for the most part, did not.
The policies of the Obama Administration
The Obama Administration launched two programs to help homeowners in distress: the Home Affordable Refinance Program (also known as HARP) and the Home Affordable Modification Program (or HAMP). HARP was in the business of refinancing underwater mortgages. Remember that if a borrower has no equity in their home, nobody will refinance them. Many people who had high interest rates were unable to refinance. This provided a boom for mortgage originators like PennyMac (PMT) and the big banks like J.P. Morgan (JPM) and Wells Fargo (WFC).
Browse this series on Market Realist:
- Part 1 - REIT must-know: Why the REO-to-rental trade was born
- Part 3 - Can investors expect mortgage guarantee fees to increase?
- Part 4 - Analyzing the political lay of the land for housing reform
- Real Estate