With over 11 million U.S. households reported to be underwater on their mortgages, almost any path to help this group would appear as a positive step towards economic recovery. Now 3.5 million of these households are being targeted for mortgage relief.
Of course, someone has to pay for this mortgage relief plan. In this case, it has been proposed large banks with assets in excess of $50 billion pay a new fee to support this mortgage refinancing program. The logic, according to the government, is these large banks all benefited from taxpayer support when the financial markets plummeted a few years ago.
The refinancing plan would cover mortgages guaranteed by Fannie Mae, Freddie Mac and private entities. From a distance it would seem most of those likely to be effected by this plan are large, often government supported in the case of Freddie and Fannie, financial institutions.
What might not be so obvious, and what is not proclaimed in the public announcements, is the residential mortgages guaranteed by most, if not all these financial institutions may have been packaged, divided and sold to a wide range of individual and institutional investors.
Individuals with investments in a very broad range of bond mutual funds, some money market funds, balanced funds, life cycle funds, target date funds and many other investment vehicles likely have exposure to securities backed by residential mortgages.
Institutional investment managers may have exposure to these same mortgage-backed securities in public and private pension plans, endowments, and most other portfolios with exposure to the bond market.
This government proposed mortgage refinancing plan won't affect all mortgage backed securities. If enacted as it has been outlined in the public disclosures, this plan will cause unexpected repayments of residential mortgages owned within a very broad range of investment portfolios. Managers of these portfolios have many options to deal with this potential refinancing. One likely outcome is the portfolio managers will be forced to reinvestment the proceeds from the mortgage refinancing into new, lower yielding mortgage backed securities.
The costs for the proposed mortgage refinancing program will be partially borne by all the various investors and beneficiaries of the investment vehicles mentioned above. Lower investment yields will be forced upon savers, beneficiaries and investors.
While the publicly stated goal of providing mortgage refinancing for as many as 3.5 million households sounds appealing, those who will ultimately pay for this refinancing include savers and investors who have some sort of exposure to mortgage backed securities. At a time when fixed income yields are already at historic low levels, another blow to these investors is not a welcome event.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.