Since December 2008 the Federal Reserve and the Treasury Department have been purchasing Mortgage Backed Securities on the secondary market. This has served to push mortgage interest rates down to historically low levels.

Why have they been doing this? What I’m about to say is strictly my musing. This is based on sheer speculation. I have no proof. Just my opinion, if you will.

To put this in context we need to look back to the September-October 2008 timeframe. You remember, about the time we suffered a near financial collapse.

There is an accounting principle called “mark to market”.  This was enacted with Sarbanes-Oxley, legislation enacted after the fall of Enron and others a few years back. The Europeans advised us not to do it, but it is now the law.

Mark to market requires publicly held companies to value their financial assets based on the current market value.

As we entered the close of the third quarter there was almost no market for mortgage backed securities. No one wanted them, at almost any price.

Mortgage loans are packaged and sold as mortgage backed securities. These are bundles or pools of mortgages. These pools may contain loans from different geographic areas, different types of loans, loans with various credit underwritings, loan to value, documentation requirements, etc.

The issue became serious as the “market” for these assets dried up. No one wanted to purchase these assets.  What was the value of these assets? Where were these loans generated? How were they documented? What was the credit standing of the borrowers? What was the original loan to value? What is the current loan to value, in a declining real estate market?

Too many questions and not enough answers, these securities had little to no value, there was too much unknown. Since the value was limited, the financial corporations had to write those assets down to “market value”. This greatly impaired the capital positions of these companies. Viola, the financial collapse of 2008.

However, there is value there! As an example, supposing there is a $1 billion mortgage pool which the market is only willing to pay $100 million for the asset. Are the underlying mortgages really only worth $100 million? Probably not, the problem was no one knew for sure.

This brings me our current point in time and what the government is up to. I think that the government has been purchasing these assets, forcing interest down, because they want everyone that can refinance to refinance their mortgage.

Why you ask? First, for each individual loan that refinances the pay off to that mortgage backed pool is not 10 to 20 cents on the dollar, but 100 cents on the dollar.

I’m not representing that these figures are accurate, but am using this to serve as an illustration.

If it is your mortgage in the pool, and let’s say your owe $100,000, and you refinance the payoff is $100,000. If the government had only paid $20,000 for your mortgage, guess what, they just made $80,000.

Your new, refinance mortgage goes to a new pool of mortgage backed securities where the valuation is more certain.

Second, if the Fed/Treasury is successful in flushing out all of those that are eligible to refinance, the individual loans that are left will represent the loans that may be a problem. Are the remaining loans in default? Are the borrowers unable to refinance due to debt-to-income or credit? Is the borrower upside down, owing more than what the property is currently worth?

Once the Fed/Treasury flushed out the pools of mortgages they can more accurately identify the problem areas. Then strategies can be developed to address those problems.

Mortgage rates are artificially low due to this action. Once whatever the Fed/Treasury has accomplished what they want to do the game will be over. Interest rates will go back up.

If you can refinance, refinance now. If you are considering purchasing a home do it now. The opportunity is here before us and it may not last long. Take action now!

I welcome your thoughts and opinions as to the current Federal Reserve and Treasury Department action. What do you think has been going on? What do you see happening ahead?

Jay Williams

www.myhomeloanwithjay.com

View my business page on facebook