This is not what it seems folks – we have seen this movie before. This ‘announcement’ is not some gracious attempt by the Fed or US government to make rates lower for US citizens and save the housing market. Rather a ‘Hail-Mary’ pass to put a bid under the trashed Agency MBS market in order pacify the likes of Bill Gross and Foreign Central Banks. Remember, in the past year and a half they have always come first. It was very evident with the first GSE bailout after Bill Gross said on national TV that unless they got in there and did something, neither he or his foreign buyer clients would be interested in any US debt for a long while.
As you all know, Fannie/Freddie MBS have been under fire for a while. This had taken mortgage rates up to record levels relative to Treasuries and to levels much higher than even a couple years ago. Everyone has been a seller in favor of US Treasuries. This had become critical. Of course, intervention was the only way out so the Fed announced it would buy $500 billion in Agency MBS likely over the next six quarters in an attempt to keep a bid under this market as sellers cash out. This was a very controversial move.
Think about it for a second…why was this move even needed? The GSE are in conservatorship, Paulson and all of the solons said ‘we stand behind the GSEs’, in theory their debt should be as good as US Treasuries but still there were many more sellers than buyers. That is a serious problem. The Fed announcing it will buy GSE MBS was nothing short of an act of last resort.
We have seen several attempts to ‘talk’ the markets better over the past year and a half and this may be just another one of those. Even so, this ‘announcement’ worked immediately and took mortgage rates down more in one hour than at any time I remember. But as investors thought about this move more clearly and used this ‘announcement’ to sell at better prices, the market leaked. All mortgage lenders were forced to re-price for the worse multiple times in a single day. Rates are still great relative to where they were prior but nowhere near that initial knee-jerk better off of the news yesterday morning. Conforming mortgage rates for the best AAA Prime, low loan-to-value with 720 scores got down to about 5.5%, down from 6% last week, but Jumbo Agency is still well over 6%.
But why did they do it this way? They could have just said ‘all GSE debt is now ‘explicitly guaranteed’. It would have had the same effect. Over time it could have had a more lasting effect. Or would that additional $5 trillion in exposure on top of the near $9 trillion the US has taken on recently have had terrible effects across the curve? I guess if you are going to commit to Phonie and Fraudie, $500 billion is better than $5 trillion.
The fact is that Agency MBS are not ‘explicitly guaranteed’, rather under conservatorship they are ‘effectively guaranteed’, which has scared to death many large investors. MBS spreads over US Treasuries clearly show this. They likely did not want to make that announcement yesterday taking us to the quantitative easing stage, but they had to. That’s because they could not ‘explicitly’ guarantee the GSE’s $5 trillion in mortgages.
In my opinion, yesterday’s announcement that over the next six quarters the Fed would buy MBS was an attempt to talk the market better and is proof that they are not planning to explicitly guaranty the debt. If I were a Foreign Central Bank or Bill Gross, I would want an explicit guaranty vs .gov buying a paltry $100 billion in GSE MBS per quarter. Remember, this $500 billion represents only approximately 10% of the total outstanding GSE mortgage guarantees.
I hope I am wrong here, but I see this move as more of a cushion that allows large Agency MBS holders to sell rather than a move to keep mortgage rates down over a long period of time. I bet we see a 6 handle on mortgage rates by year end. -Best Mr Mortgage
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