The official line was that this would reduce costs. I'm trying to figure out how this could actually save them money.
My guess is that they are "paying off" the security holder for that share of the security where mortgage payers failed to pay and the GSE had to pay out in guarantees.
So instead of paying monthly guarantee payments, they are paying lower monthly interest payments to the Treasury. At the same time, they hold mortgages which might pay a little or go into foreclosure and produce auction revenue.
First, why would security holders agree to this? Everyone is trying to chase safe yields. The GSE's have unlimited overt government backing. Why trade part of the security for a wad of cash, that'll end up being put somewhere with worse yields?
It seems the only price they'll sell at can't be profitable to the GSE's, all else the same.
Second, what does this do to the housing market? Who actually owned the mortgages and had the power to foreclose? If the security holders, they had no incentive to do so with the GSE guarantee. If the GSE, they have political pressure not to do so. Will we see more foreclosures and thus greater dips in prices (in addition to the discontinued FED support)?
If there are more foreclosures, shouldn't this also prompt more delinquent payers to start paying where they can? Perhaps this is what the GSE's believe make this a profitable deal. Now they will/can foreclose where otherwise they were sitting on a mortgage with no positive cash flow.
Third, how political is this decision? Is this simply more subsidies for low-income home "buyers"? For security holders? Something similar to P-PIP?
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