White House Denies $1 Trillion Mortgage Fix: Report (Update 2)

Refinancing article updated with report of White House denial of rumor

NEW YORK (TheStreet) -- The White House has no plans for a new mass mortgage refinancing program, Bloomberg reported, citing an administration official with knowledge of the matter.

Bank stocks had climbed Thursday afternoon despite concerns over the fate of European banks amid market chatter that President Obama might soon announce a massive refinancing program that could help boost housing and the economy in the election year.

After climbing more than 8% Thursday, shares of Bank of America(BAC) was losing 2% in after-hours trading as the Obama Administration moved to quell the rumor.

A blog post by Jim Pethokoukis at the American Enterprise Institute appeared to generate much excitement on Twitter, although it was little more than speculation.

The article cited Jaret Seiberg of the Washington Research Group, who expects the President to appoint a "housing advocate" to the Federal Housing Finance Agency, the regulator and conservator of Fannie Mae and Freddie Mac, in much the same way he appointed Richard Cordray to the Consumer Financial Protection Bureau- by making the appointment during recess.

Seiberg believes that Obama will announce a mass refinancing program for agency-backed mortgages that goes well beyond the HARP program once he makes the appointment.

According to the article, the Obama administration could announce a program modeled on one that was originally devised by Columbia University economists Glenn Hubbard and Christopher Mayer. Under that plan, all homeowners with a Fannie or Freddie-backed mortgage can refinance with a new mortgage at a fixed rate of 4.2% or less if they have been current on their payments for at least three months. And the clincher is that the plan imposes no other qualification - no appraisal or income verification.

The typical borrower would reduce his or her principal and interest payments by about $350 dollars, a total reduction in mortgage payments of nearly $100 billion per year, according to Hubbard. It is expected to help refinance $3.7 trillion in mortgages and would come at an immediate fixed cost of $121 billion to the government.

"Talk about a political and economic game changer in this presidential election year. Obama could offer a trillion-dollar stimulus -- as measured over a decade -that would directly and immediately impact tens of millions of Americans suffering from the housing depression," the article said, which seems to have spawned the $1 trillion refinancing program rumor on twitter. Here's a look at the comments.

@Bergen Capital: "Rumors going around Obama proposing a huge(possibly 1 trillion) mortgage refinancing for troubled borrowers."

@DougKass "This report of an Administration's plan to prepare a massive refinancing of mortgages buoying housing stocks and mkt."

Shares of Wells Fargo(WFC) and JPMorgan Chase(JPM) also rose. The three banks are the biggest mortgage originators in the country.

The run up in bank stocks on Thursday might have in any case been somewhat premature even if the rumor was true.

According to Stifel Nicolaus analyst Chris Mutascio, if the plan were to be implemented as suggested, it would have negative ramifications for banks because they are biggest holders of agency mortgage-backed securities and bondholders would suffer the most pain from such a plan.

"Details of such a proposed plan are sketchy at best, and we have no idea of the chances of it actually coming to fruition. But, if it were to occur, someone has to pay for it. Unfortunately, it will be the bondholders because the plan is simply a transfer of wealth from the bondholder to the homeowner via a reduction in loan yields through the refinancing," he wrote in a report.

Keycorp(KEY) is most at risk with 24% of its earning asset base comprised of GSE- mortgage backed securities, higher than the group average of 15%. In contrast, Wells Fargo and JPMorgan might carry comparatively less risk.

Mutascio adds that if the administration were to impose such a plan without breaking "contract law", the actual loans will have to be physically refinanced. In such a scenario, Wells Fargo will be best placed to benefit the most from wave of refinancing as it originated one in every four mortgages in the U.S.

--Written by Shanthi Bharatwaj in New York

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