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October 2012
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Upside Down Refinance Plan of Freddie Mac Questioned

In a recent Eliot Spitzer article published on Slate, the question of why Freddie Mac did not address underwater mortgage refinancing sooner came up. It’s not like the government sponsored enterprise was unaware of the national crisis of depreciating house values. The truth is that Fannie and Freddie own a “lion-share” of the mortgages sold on the secondary market.

Spitzer questions the “inability to get underwater mortgage loans refinanced on a mass-level.” He asserts that this is one of the signature failures of economic policy of the past four years. In a fascinating and revealing story published by ProPublica on Oct. 25, Jesse Eisinger explains how several board members and executives of Freddie Mac, the now-taxpayer-owned mortgage giant, made essentially impossible to get a high volume of upside-down loans refinanced at the current interest rates. According to Eisinger, one of these board members, Robert Glauber, objected on the grounds refinance programs were “designed to be a stimulus.”

The particular issue in 2002 had to do with spinning, a process whereby CEOs and other senior executives at companies would be given personal allocations of “hot” IPOs by the investment banks underwriting the IPOs. Hot IPOs are those in which the stock is expected to jump when trading opens, and so an allocation leads to instantaneous trading gains—often very substantial in magnitude. Why did the investment banks give the executives this option? The companies run by the CEOs were good clients, and the banks wanted these companies to continue to direct business to the investment banks.

Spitzer believes that the practice had to stop, on the grounds that the particular behavior amounted to little more than commercial bribery. If the investment bank wanted to bestow a gift on the company to maintain the client relationship—something the bank is entitled to do—then the benefit should go to the shareholders, not the CEO. If the CEO takes it individually, as they do when they take the stock granted in a spinning allocation, it is just a fancy form of bribery. Indeed, my office recovered vast sums of money from CEOs on just this theory.

Read the original Slate article.

Rates on Home Mortgages Remain Low and Affordable

The average fixed interest rate on a 30-year loan has fallen to near its record low set earlier this month. The rate on the most popular mortgage dipped to 3.37% from 3.39 last week, mortgage buyer Freddie Mac said. Two weeks ago, the rate reached 3.36%, its lowest level on records dating to 1971. The average rate on the fixed 15-year loan, often used for refinancing, set a record low of 2.66%, down from last week’s 2.7%. Today applicants that seek a no cost home loan will typically pay a point. Less costly mortgages are helping fuel a modest but steady housing recovery. The average rate on the 30-year loan has remained below 4% all year. And rates have fallen even further since the Federal Reserve started buying mortgage bonds in September to encourage more borrowing and spending. The Fed said it would continue buying bonds until the job market shows substantial improvement. When home prices rise, people tend to feel wealthier and spend more freely. And consumer spending drives nearly 70% of economic activity.

With refinancing activity surging, it makes sense to shop lenders and compare mortgage refinance rates online.

Sales on houses have inched up slightly from last year, and prices are rising more consistently in most areas. Builders are clearly more confident but has the housing market turned the corner for good. Read
the Interest Rate Article from the Detroit News.