The billion mortgage village announced by the U.S. Government and state Attorneys Generals on Thursday, February 8, 2012 is causing some concern among pension investors and bond fund managers. The village "is cheap for the loan servicers while costly for bond investors along with pension funds," according to Pacific speculation supervision Co.'s ("Pimco") Scott Simon as first reported by Bloomberg BusinessWeek.
Five leading U.S. Banks are participating in the agreement, along with Ally Financial Inc. (formerly Gmac), Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. And Wells Fargo & Co. Together, the five banks aid loan payments on roughly half of all home loans outstanding, or about 27 million mortgages, according to Inside Mortgage Finance. Other loan servicers are staggering to join the program, thereby raising possible advantage levels.
Fannie Mae and Freddie Mac, which together guarantee about 50% of all mortgages in the U.S., are excluded from the settlement.
Of the billion settlement, only billion will be paid in cash by the banks to borrowers who lost their home due to foreclosure. The balance of benefits is calculated as follows:
- Principal reduction. Underwater borrowers - meaning those who owe more on their mortgage than the loan is worth - will receive at least billion in loan reductions if they are at risk of default.
- Refinancing. Homeowners who are current on their mortgages may be able to cut their interest rate by refinancing under more lenient loan-to-value ratios. The value of the refinancing option is targeted at billion
- Special relief programs. Up to billion is targeted for unemployed borrowers, anti-blight programs, short sales, and aid member assistance.
These new mortgage relief programs will be ready to homeowners for up to three years. Incentives for loan servicers are written in a way to encourage fast performance within the first 12 months.
The village will supply direct benefits to borrowers in excess of billion, according to a government fact sheet, since servicers will receive only partial reputation for every dollar spent. Some estimates task the economic impact may be equivalent to billion.
Homeowners in Florida and California are staggering to be major beneficiaries of this historic mortgage settlement, based on the volume of delinquent loans and a precipitous drop in home values.
Pensions Face Lower Returns on Mortgage Holdings
Pensions, 401(k) plans, and assurance companies are unwitting victims of this record-setting agreement, according to fund managers like Pimco. Institutional investors lose out when the value of their mortgage-backed securities ("Mbs") decline due to government-induced primary reductions, below-market financing, and forced assistance for the unemployed or troops veterans.
Critics inquire Projected Mortgage village Benefits
Some critics say the mortgage village is too little, too late. While millions of citizen have lost their homes, for example, the village will only work on a relatively small number of them. There is also concern about "moral hazard," or the danger that more homeowners will default in order to get relief.
In Summary
As states and municipalities struggle to close an already existing trillion gap in unfunded pension liabilities, a possible additional discount in the value of assets is troubling. Plan sponsors and fiduciaries will need to work closely with accountants and auditors to identify any adverse financial impact of the mortgage settlement, and decide off-setting measures to safe funding levels.
February, 2012
Pensions May Take a Hit From National Mortgage hamlet