Skip to comments.The Fed Just Killed the Agency (Fannie Mae, Freddie Mac) MBS Market
Posted on 09/20/2012 5:00:17 PM PDT by whitedog57
The market has taken several days to digest The Feds decision to continue Operation Twist and start purchasing $40 billion per month in agency mortgage-backed securities.
The MBS market thrives on uncertainty concerning future rates and prepayment speeds. When The Fed intentionally reduces mortgage rates through quantitative easing, it takes away one of the attractions of the MBS market: risk. Now agency MBS is pricing close to Treasuries.
Freddie Macs 30 year mortgage commitment rate fell to 3.49%, almost to a new low.
The spread between Fannie Mae current coupon and 10 year Treasury yields have fallen to 13.75 basis points!
In terms of bond risk, the volatility of 10 year Treasuries fell.
In terms of agency mortgage-backed security convexity, Fannie 4.5 and higher MBS are seeing convexities of -0.4 to -0.7. Lower coupon Fannies such as 3.0 and 3.5 are seeing much more negative convexities.
The Fannie 4.5 has seen a steady fall in convexity with Fed actions.
And the Fannie 3.5 is seeing a range of convexities based on interest rate paths, particularly at +100 basis points.
Talk about taking the starch out of the market! Now, agency MBS are pricing close to US Treasuries. Pretty soon, both Treasuries and Agency MBS will lose their luster with investors as such paltry yields.
(Excerpt) Read more at confoundedinterest.wordpress.com ...
They were a cover for a Ponzi scheme. The sooner they die the better.
In a saner world the Fed wouldn't invest any taxpayer money in such worthless paper, but they are a quasi-governmental agency after all so they are only capable of quasi-intelligent/honest behavior.
They will become the Undead.
The Fed will print fake money to pay them off with weak dollars.
He/she said something to this effect: "The investors who bought them will eventually be made whole, just as they would if they had bought U.S. Treasuries."
Nobody believed him on that long-forgotten thread ... but damn, he was right!
Government dabbling in housing, education, industry and healthcare. What could possibly go wrong?
Collectivists don’t like the random way free market capitalism results in some ventures living and some dying.
They prefer to kill everything systematically.
Government income recipients/investors should be happy. The Fed’s paying the junk securities off with funny money. Ain’t the regime of recirculating debt magical?
Real estate’s going down for a very long time. My fellow Baby Boomers and I will be croaking for decades and leaving houses all over the country to rot.
Dump local regulations to allow men to build their homes and start making useful things. Then, you’ll see real investments and real, “sustainable” revenues.
If the Fed is buying mortgage-backed securities, then it's basically buying money that has already been printed when the mortgages that were bundled to create those securities were underwritten in the first place. That's how money is created, and "buying" these securities actually just insures that these mortgages -- no matter how sound they are -- will retain a certain face value over time.
* The spread between Fannie Mae current coupon and 10 year Treasury yields have fallen to 13.75 basis points!*
Don’t know where they get this. I rate locked a 7 million dollar Fannie loan this week with a 196 spread.
While the Fed is buying mortgages, I would take the opportunity to kill Fannie, Freddie, HUD, FHA, and all other federal housing agencies.
Shame you can’t arrest progressives for violating the “law of unintended consequences”! But then, they would all be in jail!
The Fed is trying to drive down interest rates so construction and home improvement markets revive (employment). Achieving price stability for Mortgage Backed Securities is secondary.
Nothing the Fed does will prop up the housing market or the securities based on housing when they're pushing on a string. In order for MBS prices to remain at levels purchased, they need 1) their underlying assets to perform at their rated level, 2) continuous demand, and 3) a proper risk-reward ratio.
1) The Fed would have to violate GAAP rules for pricing to market to ensure MBS price stability, or
2) the Fed would have to inflate MBS prices through monetary policy to a degree that would crash the economy (too many individuals are on the edge of solvency already - any price shock will become a tipping point).
There's less demand for single-family housing (mortgages) based on long term demographics and there are millions of homes already declared in default, but the banks are not evicting residents because the inventory will rot and further depress prices if the banks try to clean out their large holding of non-performing assets.
Fannie and Freddie have assumed about 90% of the sub-prime and Alt-A market, so that time bomb is waiting to explode because both NGOs need major recapitalization. Fannie and Freddies primary missions are to provide a market for MBS. (Maybe theyll park their garbage at the Fed since the Fed is even less transparent.)
If that's not enough, there's a giant problem obtaining a free and clear title for homes in default since MERS was used as a title clearing house and they didn't follow the proper legal process for transfer of title. This has created a logjam of litigation.
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