Fed May Buy Mortgages Next, Treasury Investors Bet

[hipmatt]

http://bloomberg.com/apps/news?pid=20601087&sid=akhm.v.Wd1YQ&refer=home

this is just appalling….

March 24 (Bloomberg) — Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world’s biggest Treasury investors.

Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.

The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. While purchasing the some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

“An RTC-type structure is interesting, and it may not be that much of a burden on taxpayers in the long run,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc. who helps oversee $80 billion in fixed-income assets. The government should purchase the mortgages and reissue “debt that’s backed by the U.S. government and there you go, you’ve unclogged the drain,” he said.

Bill Rates Plunge

New York Life Investment Management is considering buying “high-quality mortgages,” said Thomas Girard, a money manager at the New York-based insurer. “At some point here you’ve got to increase your allocation to non-Treasury securities.”

Mortgage bonds rallied last week. Yields on the securities fell to an average of 1.25 percentage points more than Treasuries from 1.57 percentage points on March 14, according to Merrill Lynch & Co.’s Mortgage Master Index. The so-called spread is still twice as wide as the average for all of 2007.

Investors, averse to holding most any debt except Treasuries, drove rates on three-month bills to 0.387 percent on March 20, the lowest since 1954. Rates on the securities, the safest assets next to cash, tumbled 0.59 percentage point last week to 0.57 percent. They were as high as 4.29 percent as recently as Oct. 15. The rate was 0.68 percent as of 11:48 a.m. today in Tokyo.

`Very Helpful’

“Something like that would be very helpful, but the Fed was not designed to and shouldn’t assume a huge amount of risk on behalf of taxpayers,” said Alan Blinder, a Princeton University professor and former vice chairman of the central bank. “That should come out of the elected parts of the government, which means the administration and Congress.”

President George W. Bush and Treasury Secretary Henry Paulson have resisted calls urging the use of government funds or guarantees to stem a record amount of mortgage foreclosures, the root of the financial crisis, preferring that the markets resolve the trouble. Bush said March 15 he wanted to avoid “bad policy decisions” that would do more harm than good.

President George H.W. Bush, the current president’s father, signed the 1989 law which created the RTC to dispose of the assets of insolvent savings and loans banks. From 1986 through 1995, 1,043 savings banks with over $500 billion in assets failed, costing taxpayers $75.6 billion, according to a Federal Deposit Insurance Corp. analysis.

Joint Action

The Fed, the Bank of England and the European Central Bank are exploring the feasibility of using taxpayers’ money to shore up the mortgage-backed securities market, the Financial Times reported on March 22, without saying where it obtained the information. A Fed official denied to Bloomberg News that day that it’s in discussions to buy mortgage debt.

Smaller steps are already being taken. The Bush administration reduced the amount of capital Fannie Mae and Freddie Mac are required to hold as a cushion against losses. The March 19 agreement allows the government-chartered companies, the largest sources of money for U.S. home loans, to expand their purchases of mortgages by as much as $200 billion.

The Fed has also lowered borrowing costs, opened the so- called discount window to investment banks and arranged the sale of Bear Stearns Cos. since March 16 to ease financial-market turmoil. The world’s biggest financial companies have posted at least $195 billion in writedowns and credit losses tied to subprime mortgages and collateralized debt obligations as of March 20, according to data compiled by Bloomberg.

`Done That Already’

JPMorgan Chase & Co. agreed to pay about $240 million for the fifth-largest securities firm in a transaction that includes as much as $30 billion of financing provided by the Fed for Bear Stearns’s “less-liquid” assets.

“In a sense they’ve done that already with Bear Stearns,” Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments, said of the government taking on the risk of owning mortgage securities. “This was not just a temporary situation. The process has begun, the question is how far can it go?”

Franklin Templeton manages $110 billion of bonds. Materasso is based in New York.

A March 13 proposal by Senator Christopher Dodd and Congressman Barney Frank that the Federal Housing Administration insure refinanced mortgages after lenders reduce the loan principal to make payments more affordable to homeowners “is the next step,” Senator Charles Schumer, a New York Democrat, said in a Bloomberg Television interview on March 19. It’s a “broader step, but not as broad as RTC,” he said.

For Pimco’s Gross that’s not enough. “If Washington gets off its high `moral hazard’ horse and moves to support housing prices, investors will return in a rush,” he wrote in a note to investors published Feb. 26. Gross, who runs the $122 billion Total Return Fund from Newport Beach, California, didn’t return calls seeking additional comment.

An RTC-like entity may not be “the best idea, but maybe it’s the idea that gets us through this,” said New York Life’s Girard. “The likelihood of it happening has certainly increased.”

To contact the reporter on this story: Daniel Kruger in New York at [email protected]

[SD Realtor]

Why does this surprise anyone at all? Really isn’t this the next logical step in the bailout process?

Just remember this date, April 9th. Lots of fun will happen on that day.

[SD Realtor]

Why does this surprise anyone at all? Really isn’t this the next logical step in the bailout process?

Just remember this date, April 9th. Lots of fun will happen on that day.

[SD Realtor]

Why does this surprise anyone at all? Really isn’t this the next logical step in the bailout process?

Just remember this date, April 9th. Lots of fun will happen on that day.

[SD Realtor]

Why does this surprise anyone at all? Really isn’t this the next logical step in the bailout process?

Just remember this date, April 9th. Lots of fun will happen on that day.

[SD Realtor]

Why does this surprise anyone at all? Really isn’t this the next logical step in the bailout process?

Just remember this date, April 9th. Lots of fun will happen on that day.

[DWCAP]

What happens on April 9th? I want to have fun too!

[DWCAP]

What happens on April 9th? I want to have fun too!

[DWCAP]

What happens on April 9th? I want to have fun too!

[DWCAP]

What happens on April 9th? I want to have fun too!

[DWCAP]

What happens on April 9th? I want to have fun too!

[SD Realtor]

Someone can correct me but I am pretty sure that April 9th is the date that there will be a hearing to review Barney Franks proposal to permit the FHA to provide up to 300B in loan guarantees for refinancing. Basically in exchange for having lenders accept substantial write-down of principal, lenders would RECEIVE payment fom the proceeds of a new FHA loan if the restructured loan resulted in terms that the borrower can reasonably be expected to pay.

Let’s not forget that the government would be on the hook for these loans.

*******

I hate posting long quotes but this one from Doug Noland was good regarding last weeks shenanigans…

“As far as I’m concerned, much of the U.S. mortgage market was this week essentially Nationalized. I’ll take the dramatic narrowing in agency debt and MBS spreads as support for this view. Additional support arrived from comments from Mr. Lockhart, Mr. Paulson, and actions by the Federal Reserve. Having lived contently for years with the markets’ interpretation of the (grey-area) “implied” government backing of the GSEs, our policymakers are surely today satisfied with the inferred market acceptance of mortgage industry Nationalization. To be sure, the Fed’s Splashy “Sunday Night Special” bailout of Bear Stearns is rather trivial in both its implications and consequences when compared to Thursday’s Quiet Coup.
Let’s look at the Fed’s denial one more time: “The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS (mortgage-backed securities).”

Reading carefully, that statement is not a denial of having discussions (I presume they are). It is only a denial of “coordinated buying of MBS”. What about uncoordinated buying? Still, such action would have to come from Congress, not the Fed.

And (for now anyway), I doubt that Fannie and Freddie are going to go on a garbage mortgage gobbling spree. Just because there are new higher limits at Fannie and Freddie, that does not mean that Fannie and Freddie will be taking every loan in sight.”

SD Realtor

[SD Realtor]

Someone can correct me but I am pretty sure that April 9th is the date that there will be a hearing to review Barney Franks proposal to permit the FHA to provide up to 300B in loan guarantees for refinancing. Basically in exchange for having lenders accept substantial write-down of principal, lenders would RECEIVE payment fom the proceeds of a new FHA loan if the restructured loan resulted in terms that the borrower can reasonably be expected to pay.

Let’s not forget that the government would be on the hook for these loans.

*******

I hate posting long quotes but this one from Doug Noland was good regarding last weeks shenanigans…

“As far as I’m concerned, much of the U.S. mortgage market was this week essentially Nationalized. I’ll take the dramatic narrowing in agency debt and MBS spreads as support for this view. Additional support arrived from comments from Mr. Lockhart, Mr. Paulson, and actions by the Federal Reserve. Having lived contently for years with the markets’ interpretation of the (grey-area) “implied” government backing of the GSEs, our policymakers are surely today satisfied with the inferred market acceptance of mortgage industry Nationalization. To be sure, the Fed’s Splashy “Sunday Night Special” bailout of Bear Stearns is rather trivial in both its implications and consequences when compared to Thursday’s Quiet Coup.
Let’s look at the Fed’s denial one more time: “The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS (mortgage-backed securities).”

Reading carefully, that statement is not a denial of having discussions (I presume they are). It is only a denial of “coordinated buying of MBS”. What about uncoordinated buying? Still, such action would have to come from Congress, not the Fed.

And (for now anyway), I doubt that Fannie and Freddie are going to go on a garbage mortgage gobbling spree. Just because there are new higher limits at Fannie and Freddie, that does not mean that Fannie and Freddie will be taking every loan in sight.”

SD Realtor

[SD Realtor]

Someone can correct me but I am pretty sure that April 9th is the date that there will be a hearing to review Barney Franks proposal to permit the FHA to provide up to 300B in loan guarantees for refinancing. Basically in exchange for having lenders accept substantial write-down of principal, lenders would RECEIVE payment fom the proceeds of a new FHA loan if the restructured loan resulted in terms that the borrower can reasonably be expected to pay.

Let’s not forget that the government would be on the hook for these loans.

*******

I hate posting long quotes but this one from Doug Noland was good regarding last weeks shenanigans…

“As far as I’m concerned, much of the U.S. mortgage market was this week essentially Nationalized. I’ll take the dramatic narrowing in agency debt and MBS spreads as support for this view. Additional support arrived from comments from Mr. Lockhart, Mr. Paulson, and actions by the Federal Reserve. Having lived contently for years with the markets’ interpretation of the (grey-area) “implied” government backing of the GSEs, our policymakers are surely today satisfied with the inferred market acceptance of mortgage industry Nationalization. To be sure, the Fed’s Splashy “Sunday Night Special” bailout of Bear Stearns is rather trivial in both its implications and consequences when compared to Thursday’s Quiet Coup.
Let’s look at the Fed’s denial one more time: “The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS (mortgage-backed securities).”

Reading carefully, that statement is not a denial of having discussions (I presume they are). It is only a denial of “coordinated buying of MBS”. What about uncoordinated buying? Still, such action would have to come from Congress, not the Fed.

And (for now anyway), I doubt that Fannie and Freddie are going to go on a garbage mortgage gobbling spree. Just because there are new higher limits at Fannie and Freddie, that does not mean that Fannie and Freddie will be taking every loan in sight.”

SD Realtor

[SD Realtor]

Someone can correct me but I am pretty sure that April 9th is the date that there will be a hearing to review Barney Franks proposal to permit the FHA to provide up to 300B in loan guarantees for refinancing. Basically in exchange for having lenders accept substantial write-down of principal, lenders would RECEIVE payment fom the proceeds of a new FHA loan if the restructured loan resulted in terms that the borrower can reasonably be expected to pay.

Let’s not forget that the government would be on the hook for these loans.

*******

I hate posting long quotes but this one from Doug Noland was good regarding last weeks shenanigans…

“As far as I’m concerned, much of the U.S. mortgage market was this week essentially Nationalized. I’ll take the dramatic narrowing in agency debt and MBS spreads as support for this view. Additional support arrived from comments from Mr. Lockhart, Mr. Paulson, and actions by the Federal Reserve. Having lived contently for years with the markets’ interpretation of the (grey-area) “implied” government backing of the GSEs, our policymakers are surely today satisfied with the inferred market acceptance of mortgage industry Nationalization. To be sure, the Fed’s Splashy “Sunday Night Special” bailout of Bear Stearns is rather trivial in both its implications and consequences when compared to Thursday’s Quiet Coup.
Let’s look at the Fed’s denial one more time: “The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS (mortgage-backed securities).”

Reading carefully, that statement is not a denial of having discussions (I presume they are). It is only a denial of “coordinated buying of MBS”. What about uncoordinated buying? Still, such action would have to come from Congress, not the Fed.

And (for now anyway), I doubt that Fannie and Freddie are going to go on a garbage mortgage gobbling spree. Just because there are new higher limits at Fannie and Freddie, that does not mean that Fannie and Freddie will be taking every loan in sight.”

SD Realtor

[Author]

Posts