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Fire Sale of "Toxic Assets" Could Affect Mortgage Refinance Market

[Jul 30, 2009.]


Many factors are affecting the mortgage refinance market right now. Stabilizing home prices and government mortgage assistance programs are two that have received major attention.

One factor that is less well-known, but perhaps just as important in the big picture of mortgage finance, is the purging of the so-called "toxic assets" from the balance sheets of banks. As argued in this incisive post about bank assets, banks must shore up their balance sheets if the credit markets are to fully recover.

One way to shore up those balance sheets is to sell off "bad" loans to third-party investors.

PennyMac IPO a Sign That Investors Are Mulling the Purchase of Toxic Assets

A company called PennyMac Investment Mortgage Trust began selling stock to the public today. The PennyMac IPO wasn't a blockbuster, but going public in these markets is a feat in and of itself. It is estimated that the IPO raised approximately $335 million.

PennyMac, founded by former Countrywide Financial president Stanford L. Kurland, is in the "specialty finance" business of buying up distressed home loans. The business model is predicated on the idea that banks will be willing to sell these troubled assets at an extreme discount to their face value. The PennyMac IPO is intended to raise money to purchase those troubled hom loans.

PennyMac would then attempt to collect more on the loans than they bought them for.

FDIC Trying to Entice Investors, Offering Sweet Deals on Loans

The PennyMac business model is made plausible by the FDIC Legacy Loans Program. This program was created to make investing in bad loans a good business to be in.

In essence, the federal government will provide cheap loans and risk-sharing to third-party investors who purchase toxic assets from banks. Banks, then, would have more capital on hand to make new loans.

This process is barely underway, but making some headway.

What Does It Mean for People Who Want to Refinance?

If PennyMac and companies like it build a successful market for distressed home loans, the impact on the home mortgage finance world could be significant. Banks would have more money to lend, and perhaps would be willing to lessen strict underwriting standards to some degree.

As "bad" loans were cleared off the bank balance sheets, lending would increase. Refinancing, then, would become at least somewhat easier. Or at least that's the theory here.

To get a current mortgage refinance quote, go here.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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