Fed Buying Agency MBS – Still No ‘Explicit’ Guaranty

Posted on November 26th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

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

More Mr Mortgage

18 Responses to “Fed Buying Agency MBS – Still No ‘Explicit’ Guaranty”

  1. If our collective OUTRAGE over the robbery of our country could elect Barack Obama then we need this kind of collective help once again!!!!

    WHERE is the transparency and accountability we were promised with this absolute WASTE of taxpayer money–otherwise known as the multi-trillion dollar bailout??!!!!

    Their phones have essentially been SILENT over this!!
    IT IS UNBELIEVABLE!!!!

    If you aren’t going to speak out about the absolute financial destruction of this country, then WHEN will you speak out?? We are dumping this entire burden on your children without question!

    Every single citizen in this country should be CALLING their representatives in Congress and DEMANDING the accountability and transparency that CONGRESS and our govt. has promised!!!!

    Scroll down on the attached page for your state’s link and ring these phones off the hook. Show them American’s will not be led like lambs to the slaughter!! We must not let them think we do not care!

    http://www.house.gov/house/MemberWWW_by_State.shtml

    Please copy and paste this post far and wide to everyone you know!!!!

  2. The whole idea must just to be to wear the people out, so eventually they dont care any more..I know i am starting to get very tired of worrying about stuff that i have no control over, hopefully i will get my 2nd wind and be more angry after Thanksgiving, but it seems the powers know that the sheep will get in line after months of SPIN and BS and they will never do a thing about it

  3. […] Comments Javagold on Fed Buying Agency MBS – Still No ‘Explicit’ GuarantyDavid on Fed Buying Agency MBS – Still No ‘Explicit’ Guarantyex_owner_now_renter on […]

  4. Baaaah…baaahhh.

    I agree, the sheeple won’t do anything.

  5. Javagold, I am with you. I was so furious when they started with the $700 Billion bailout plan and it has increasingly gotten worse. I am tired as well of the good fight. Since before the election to today it seems to keep getting worse. I even pissed the man off due to my impatience and lack of tolerence from all of this. My wife booked a vacation to chill me out and we leave tomorrow. Who knows maybe it will work. I am not going near this stuff for 10 days!!

    Mr. M. when you say this better work what exactly are you implying? How is it much different than all the other spending? Is it because it is mostly toxic paper that we are buying and we may get only .20 on the dollar for it?

  6. Who did more damage, foreign terrorist Osama Bin Laden operating from Afghanistan or USA terrorist operating from within? Osama has a 25 million dollar price tag on his head, yet I have seen no price tags issued yet for terrorist on our own soil. Maybe if we took all the shoe checkers at the airports and reassigned them to financial crimes we could produce. Maybe if Obama in his job creation package could assign some jobs specifically aimed at bringing justice on behalf of the American people, that would be a decent change. Bush was a war president and Obama is a change president, as that will be likely all we have in our pockets when his term is over…. rant rant rant….

  7. I am still trying to grasp what’s going on right before my eyes that I’m not yet seeing clearly. Feels like being Bob Woodward getting clues from Deepthroat to keep following the money (all the way to the top).

    Where does the money lead to? What’s really going on because it feels like smoke and mirrors with each passing day.

    Maybe some of you with better grasp on this (Stu & BertDilbert) can shed some light on the situation.

  8. This is the old “confidence game” in a fractal banking system. The key is investor confidence. If they believe that they can sell at par at some point in the future when they will need the money, then they do not need to liquidate today.
    If the Fed can convince foreign central banks to hold Freddie and Fannie paper with this bluff, then they do not need to put the full faith and credit guarantee on Freddie and Fannie paper.
    They then do not need to bring all of the $5 trillion onto the balance sheet of the Fed and get the best of both worlds.
    The accounting games are a joke and are going to destroy the economy in the bubble they are already building.

  9. A solution:
    Pitchforks and torches can mean many things to many people. What if Americans who are fed up with the Gov./Wall Street conspiracy BOYCOTTED. Our participation in the economy is obviously vital.

    1- Quit playing the Market. Take you money out of the major players who are benefiting by the sham bailout. Withdraw all of your money from those banks and find a good, local community bank (until they get bought out.) Quit putting money into the stock market, start a small business out of your house or open up a small business. The legal tax right-offs are very advantageous.
    2- Recommend anyone in foreclosure to SUE the lender by initiating an audit on their loan to look for Respa, TILA, etc., violations.
    3- Don’t vote for Democrats or Republicans. A 3rd party may stand a chance in 2012 when nothing good is accomplished in this next 4 year term. We will see in the end that the system is rigged to fleece us and control us. We can only be fleeced and controlled if we submit to their will. This 3rd party must not include any religious/fringe platforms and must be centered around a CONSTITUTIONALIST CENTERPIECE, be broad based, States’ Rights based, and grass roots, in nature. Prove to your friends and family that the system and current players are corrupt. “Why do we keep electing the same families/players over and over again?
    4- Go underground with your personal economy. Consult with an attorney and an accountant on how to do this legally. Get out of debt forever and throw off your shackles. Bankruptcy is a viable solution for many. Chapter 7 is a “clean slate” and bad credit is bad credit either way you look at it. Use the laws to protect you and your family.
    5- Don’t buy products who advertise on any of the talking head mainstream TV shows. Turn the cable off, quit reading their newspapers. Where is honest journalism?
    6- Educated yourself, your family and your friends.
    7- Press for indictments and investigations. If the “news” organizations are bought and paid for, then press them for accountability, as well.
    8- Support alternative information websites to keep them in business. This site is a good place to begin. Support this site financially.
    9- Fight one good fight at a time and follow through with it all the way. You can’t fight all battles all the time.
    10- Change America or leave it. Sitting on the sidelines and bitching is what they want you to do. Divide and conquer is their motto. Hence the 2 party system is fraudulent- full of rhetoric but lacking in substance and truth. A basic sales closing tool is the “Alternate Choice Close” – “Would you prefer to own the blue model or the red?” Either way you choose, you bought it and own it. CHOOSE NEITHER!
    11- Influence and organize a group around the NEW AMERICA. Go all the way with it, keep it within the law. The law may be our only hope.
    12- Find 5 people and get on the same page. Each of those 5 find 5 a piece, and so on… The right movement will come along because the universal laws operate perfectly. What you focus on expands.
    13- Stick to your guns… believe in what you are doing and don’t quit.
    14- If you work for a bail-out company – quit them and start up a guerrilla company to beat them. Your new clients will appreciate you.
    15- DO NOT BUY ANY PRODUCT FROM ANY COMPANY THAT IS BAILED OUT! They will finally die a natural death as a company. If you don’t feed them, they will starve and go away. DO NOT BUY FROM THE COMPANIES WHO HIRED THE OLD CEO AND MANAGEMENT. IDENTIFY THE ALLEGED CRIMINALS AND SUE THEM WHENEVER APPLICABLE. Hold them personally accountable and liable.

    Good luck, America.

  10. A solution:
    Pitchforks and torches can mean many things to many people. What if Americans who are fed up with the Gov./Wall Street conspiracy BOYCOTTED. Our participation in the economy is obviously vital.

    1- Quit playing the Market. Take your money out of the major players who are benefiting by the sham bailout. Withdraw all of your money from those banks and find a good, local community bank (until they get bought out.) Quit putting money into the stock market, start a small business out of your house or open up a small business. The legal tax right-offs are very advantageous.
    2- Recommend anyone in foreclosure to SUE the lender by initiating an audit on their loan to look for Respa, TILA, etc., violations.
    3- Don’t vote for Democrats or Republicans. A 3rd party may stand a chance in 2012 when nothing good is accomplished in this next 4 year term. We will see in the end that the system is rigged to fleece us and control us. We can only be fleeced and controlled if we submit to their will. This 3rd party must not include any religious/fringe platforms and must be centered around a CONSTITUTIONALIST CENTERPIECE, be broad based, States’ Rights based, and grass roots, in nature. Prove to your friends and family that the system and current players are corrupt. “Why do we keep electing the same families/players over and over again?
    4- Go underground with your personal economy. Consult with an attorney and an accountant on how to do this legally. Get out of debt forever and throw off your shackles. Bankruptcy is a viable solution for many. Chapter 7 is a “clean slate” and bad credit is bad credit either way you look at it. Use the laws to protect you and your family.
    5- Don’t buy products who advertise on any of the talking head mainstream TV shows. Turn the cable off, quit reading their newspapers. Where is honest journalism?
    6- Educated yourself, your family and your friends.
    7- Press for indictments and investigations. If the “news” organizations are bought and paid for, then press them for accountability, as well.
    8- Support alternative information websites to keep them in business. This site is a good place to begin. Support this site financially.
    9- Fight one good fight at a time and follow through with it all the way. You can’t fight all battles all the time.
    10- Change America or leave it. Sitting on the sidelines and bitching is what they want you to do. Divide and conquer is their motto. Hence the 2 party system is fraudulent- full of rhetoric but lacking in substance and truth. A basic sales closing tool is the “Alternate Choice Close” – “Would you prefer to own the blue model or the red?” Either way you choose, you bought it and own it. CHOOSE NEITHER!
    11- Influence and organize a group around the NEW AMERICA. Go all the way with it, keep it within the law. The law may be our only hope.
    12- Find 5 people and get on the same page. Each of those 5 find 5 a piece, and so on… The right movement will come along because the universal laws operate perfectly. What you focus on expands.
    13- Stick to your guns… believe in what you are doing and don’t quit.
    14- If you work for a bail-out company – quit them and start up a guerrilla company to beat them. Your new clients will appreciate you.
    15- DO NOT BUY ANY PRODUCT FROM ANY COMPANY THAT IS BAILED OUT! They will finally die a natural death as a company. If you don’t feed them, they will starve and go away. DO NOT BUY FROM THE COMPANIES WHO HIRED THE OLD CEO AND MANAGEMENT. IDENTIFY THE ALLEGED CRIMINALS AND SUE THEM WHENEVER APPLICABLE. Hold them personally accountable and liable.

    Good luck, America.

  11. rocketrob

    Maybe a partial solution is not to do business with any of the offending companies. Perhaps instead of companies certifing that they are green, they can certify that they do not do business with any company involved with the bailout. Consumers can then make buying decisions with companies that are like minded.

  12. Art

    Does it seem kind of like the Great Train Robbery in broad daylight?

    I have difficulty in believing that all the banks could have been that loose in lending standards. Then on the other hand, were they operating out of Wall Street pressure not to miss a number? Were they merely a victim of themselves creating competitive products to capture market share? Was the environment too competitive which lead to their own destruction?

    Or was it all a diabolical plot by the Skull and Crossbones?

  13. Or Rob, look around you and see where there is opportunity. These times are presenting a slew of wonderful investment opportunities. There is much money to be made from economic carnage. Wake up, grow up and find a way to proper in this environment.
    In my years of experience, I have found those who blame the government also look to government to save them. Seems crisis is the friend of government as it has the sheple clamoring for moreand more “help”.
    Good luck to you all and may God bless you and your family.

  14. […] It Does Not Mean What it Used to Recent PostsMortgage Rates Drop! It Does Not Mean What it Used toFed Buying Agency MBS – Still No ‘Explicit’ GuarantyI Think I’m Turning Japanese, I Really Think SoDonny Deutsch Has ‘The Right Idea’ On […]

  15. Yet another bandaid! The Fed was instrumental in creating this mess, along with its phony credit, and are now attempting to dust it over useing the Monopoly money from the bailout… aka TARP…or your future tax dollars. The sad part is, most do not realize how dire the situation is and how serious the consiquences are.
    When are people going to wake up from all of these desparate smoke and mirror bullshit attempts of the Gov’t pretending to look like they are really trying to help the situation? The solution lies in the truth coming out as to how so many banks and other institutions are completly insolvent and lay all of the cards on the table: sounds refreshing doesn’t it? Get rid of the FED, fire Ben and Hank for a good start. This would be harsh but at least the system could begin to rebuild itself, and then maybe make a new start. The destructive actions of the FED have put us on a path, that will continue to spiral downward for several more years, much similar to the colapse of Japan’s economy. They are useing the same playbook. The bailouts were orchestrated to save Hank’s wall street buddies..and thats it. I try to illustrate this to my friends and they look at me like my hair is on fire! I guess I come off sounding crazy but I really think we have reached a point that if actions such as this are not taken and taken quickly we are in for many, many more years of pain..much more severe than 1929. I’m not a religious fanatic but I am praying for a miricle, because I think we are nearly out of options of any hope to save the United States financials system.
    Sorry for the rant>>

  16. […] Mortgage Rates…5.5% Does Not Exist For MostMortgage Rates Drop! It Does Not Mean What it Used toFed Buying Agency MBS – Still No ‘Explicit’ GuarantyI Think I’m Turning Japanese, I Really Think SoDonny Deutsch Has ‘The Right Idea’ On […]

  17. Great post rocketrob. The word must be spread in whatever way possible. I’m going to write something for the theatre in London and do my bit to pass on the knowledge. I’m sure I’ll feel sorry for Britain soon, but I feel so sorry that your new hope, Obama, is bought and paid for already. The web is woven and it is wide and all-encompassing and many fat spiders suck what’s left of the blood of the poor – whom they despise. And we line up to offer them a vein. Because we are too terrified or too stupid not to. I look at my own Prime Minister and I think, ‘You know… You MUST know what’s going on. How can you sell us down the river?’ I am disgusted by it all. I am saddened. But I am still angry. Grow the web of anger and smother the ‘Mothers’.

  18. It’s not that nonsensical imho. Government already guaranteed a 100 billion infusion of capital in Fannie Mae and Freddie Mac in the event their GAAP financial statements show that they are insolvent. Yes that is not unlimited support but it is unlikely that Fannie / Freddie lose whateve stockholder equity they have plus 100 billion. Fannie guarantees and owns about 3 billion dollars face value of mortgages and has around 15 billion GAAP S/E. So let’s say it will have to lose around 3.3 % on the mortgages. That doesn’t seem like a big number, but consider this:
    1. Losses take time to be realized. As of today, cumulative losses on mid 2006 SUBPRIME RMBS trusts such as New Century, Fremont, Accredited, etc are around 4 %.

    2. While those losses are realized, interest income and guarantee fees continue accruing.

    With this in mind, I understand that the government uses low yield treasury bonds (especially the short-term bonds) to buy much higher yielding Fannie Mae debt. It makes sense to me.

    That said, government must realize that mortgage rates WILL go up and, in fact, they SHOULD go up. The American consumer abused debt to fuel consumption – sooner or later, the music must stop. The worst thing the government can do is a round of subsidies and “stimulus” to spur spending. That will just make the balance of the US debt swell even further.

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