Special Report
02/12/2009
The financial markets have had a lot to digest in the last two days:
- Treasury Secretary Geithner announced an all-encompassing plan that had the complete opposite effect on Wall Street and was bereft of any real details. This is already being used as a case study by universities on how not to make a public policy statement. We have already issued a Special Report on the broad strokes of this "policy".
- The Senate finally passed their version of the "stimulus" bill and late on Thursday a compromise was reached between the Senate and House on the largest social grab-bag spending package in history.
- The Obama administration continues to leak details about their housing plan without officially releasing the details of the plan.
Information has been very fluid on the last two items and there has been a lot of speculation on what this means to the housing industry. We will continue to give you updates as real, confirmed details emerge.
First, the stimulus package (officially known as the "American Recovery and Reinvestment Act") will not do anything to materially help the housing market. If any modicum of stimulus is actually achieved it will not occur for some time. The following is a link to a report of how the ARARA will help each state...it is a very big file:http://www.isysholdings.com/mbsratewatch/ARRAStateByState.pdf
Secondly, the Obama housing plan is still not for real yet....when it has a fancy name like the "American Recovery and Reinvestment Act" then you know it is official. Maybe they could call it the "Rewarding Americans for Screwing their Mortgage Servicers Act". Reuters has been the principal source quoted by the major media outlets for the limited details that we have.
Based upon the very limited information that we have it appears to be a friendly version of the cram down (see the Cram Down Special Report in our Resources section). Certain borrowers that meet a supposedly strict test for debt ratios will be able to get a new appraisal to prove their house is worth less and then obtain help from the government in the form of a principal reduction and or a reduced monthly payment with the government covering the difference between the actual contractual payment and the reduced monthly payment. Both of these options would be paid for by the tax payers and the creation of even more deficit spending that can only be filled with the additional sale of massive amounts of Treasury bills which in turn compete against MBSs for foreign investment.
Mortgage holders would be encouraged to participate by a combination of incentives and "persuasion" by our government.
We are also aware that foreclosure moratoriums have been quietly negotiated between the government and the major mortgage holders such as Wells Fargo. While this might make sense as a solution, servicers and mortgage-backed-security holders are not a fan of this as it alters their investments.
It is very difficult to gauge the affects of these policies on mortgage-backed-securities and on rates. Traders are very confused and concerned due to the huge lack of details. This is hurting MBS prices and your rates at this point. For an administration that is championing transparency, we certainly have a lack of it. The market is forced to trade conservatively until details emerge.
How many new MBSs will be purchased? We do not know. What are the details on the housing bill? We do not know. Will anyone actually qualify for it?
These are certainly unusual circumstances. MBSs are not trading on market fundamentals which is a cause for concern.
Bryan S. McNee
Sr. Bond Analyst
MBSRateWatch.com
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