Housing Smoke and Mirrors (24) – “Elementary”

Written by , KeySignals.com

The Sherlock Holmes theme was introduced into the Housing Smoke and Mirrors story in “On the Contrary”. This theme has been extended to the investigation of the curious case of the various “Acronyms” being employed by the Federal Government in its attempt to stimulate the economy with the able assistance of its loyal sidekick the Federal Reserve. This double-act was observed in Housing Smoke and Mirrors (18) – “The Mendacity of HOPE (and HARP and HAMP)”; fiendishly expanding the Federal Housing Footprint by employing the Red-Herring of an alleged contraction in the GSE Footprint.

The plot thickened in July. Fannie Mae’s Streamlined Modification programme (SMP “Acronym”) rolled out to great fanfare at the beginning of July[i]. It was promoted as the saviour of homeowners facing potential delinquency and foreclosure. In practice it created new pools of modified mortgages that Fannie Mae can now securitize. More importantly, it created new tranches of MBAs that the Federal Reserve can now legally purchase without fear. The agency by which the Fed’s balance sheet can now be expanded to riskier mortgages has now been established.

The game was afoot; and Freddie Mac wasted little time catching up with its partners in crime[ii]. Late in the day on September 16th, Freddie innocuously published its latest bulletin for its Single-Family Servicer Guide (Bulletin 2013-17); which covers “changes” to the Home Affordable Modification Program (HAMP), Streamlined Modifications (SMP’s) and the “Pay for Success” (PFS) incentive. These changes became effective immediately by fiat on publication.

All Freddie’s HAMP modifications must now have a Trial Period Plan effective date on or before March 1, 2016; and Modification Effective Dates on or before September 1, 2016. Freddie extended HAMP in May; and now this extension closely correlates with the Federal Reserve’s extended period of balance sheet expansion. HAMP mortgages can now effectively be passed from Freddie’s balance sheet to the Fed’s. This latest development clearly flags that the Fed has no intention of shrinking its balance sheet in relation to MBAS any time before 2016. All that is required for qualification is that the mortgage be shown to have a Net Present Value (NPV) equal to or greater than zero. Clearly the very fact that the Fed will be buying in 2016, gives these mortgages a hypothetical value of zero or above. This circuitous logic therefore creates value that is self-serving for political purposes. Just in case there are still some real dogs out there in mortgage land, Mortgage Servicers were also reminded that if a borrower is determined to be ineligible because of a negative NPV, or for any other reason related to eligibility criteria, that this borrower must be considered for other foreclosure alternatives (aka other “Acronyms”) that the Fed can buy. Freddie’s Streamlined Modification program (SMP “Acronym”) was extended to allow servicers to continue to offer Trial Modification Plans with effective dates on or before December 1, 2015. Freddie’s distressed mortgage to Fed balance sheet agency model is working well. In fact, Freddie’s schemes have been so successful to date that it no longer needs to pay Servicers financial incentives to make the process work. Freddie currently pays Servicers an annual success incentive of $1,000 a year, for three years, for HAMP-eligible mortgages; this will be discontinued for HAMP modifications with effective dates on or after April 1, 2014. The Servicers have one more year to line their pockets, by means of severance bonus.

The Federal Government safety net to maintain economic momentum, just as the Congress goes into meltdown mode over the Debt Ceiling, is therefore primed and ready to go. The potential fiscal headwind has therefore been mitigated to a certain degree by the “Acronyms”. The Federal Reserve also primed the monetary pump to make all this possible at the September FOMC; when the “No Taper” decision because of the potential fiscal headwinds was announced.


[i] Fannie’s Streamlined Mod Option Helps 11K Borrowers Since July
[ii] Freddie Mac Updates HAMP, Streamlined Mods; Retires “Pay for Success”
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