|Underwater mortgage refinancing: Who's bailing out who?|
Because mortgage loans greater than 125% loan to value cannot be included in regular Collateralized Mortgage Obligations (CMO's), the mortgages created in HARP 2.0 (this program targets homeowners who are REALLY upside down in their mortgages) are ultimately, created, insured and owned by Fannie and Freddie and can't be sold in a "regular" bond issue. These loans will need to stay on Freddie and Fannie's balance sheets for now.
So what's the rub and why can't they stay with Fannie and Freddie?
For now, holding onto the HARP 2.0 loans is not a problem. But because the Economic Recovery Act enacted 2 years ago (American Recovery and Reinvestment Act of 2009) mandates that Freddie and Fannie reduce their mortgage holdings by 10% per year, it seems unlikely that they will be able to hold onto these mortgages for the long run. So the questions becomes, "What do you do with a 300% loan to value mortgage loan?".
- If in the future Freddie and Fannie would need to sell mortgages created by HARP 2.0, they would need to create a "special" class of mortgage backed securities which would be riskier (over 125% LTV) and would require a higher return in the secondary market (sorry, just a quick Economics 101 moment here: to sell mortgage bonds with higher risk you would need to pay investors a higher return on their investment in order for them to be enticing to investors and sell in the secondary market).
If the bond yield to sell them is higher, who pays for the higher yield payments to these investors (for up to 30 years because the mortgage backing the securities have a 30 year maturity)?
The answer is simple: Because Freddie and Fannie are under the conservator ship of the Government which IS the American taxpayer, WE get to pay the higher cost and yield on these HARP 2.0 loans to investors IF they need to be sold off of Fannie and Freddie's balance sheets.
Sorry, it appears that HARP 2.0 is just another burden the Government is putting on the American taxpayer.