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To: sf4dubya
I've been told multiple times that a GSE bailout would result in a long term INCREASE in mortgage interest rates, which would in turn accelerate the RE market's price deflation.

Basically true. Mortgage interest rates are a convergence of a number of factors, essentially prevailing rates plus the risk premium for mortgages. The risk premium (and to some extent the base) is set by the market in the secondary market for mortgage securities. Before the takeover, the agency securities sold for treasuries plus 43bp (0.43%). That was rather low (actually ridiculously low) considering the state of the typical American borrower and factors that increased risk (e.g. 14% of the securities were made up of Alt-A loans).

The reason that the securities had such a low risk premium was their implicit gov. guarantee. Now the guarantee is explicit. The agency paper will now be treasuries plus 0 bp (or some arbitrary premium declared by the US Gov and not set by the market). Does it mean that the risk from US borrowers defaulting is now reduced? Did their incomes increase? Did their house prices bottom out? The answer to all those questions is no. So what happened instead today was the risk premium of the entire US government just went up. Treasuries fell and their yield increased.

The short answer is looking at today, rates are up, and looking long term, there is no decrease to risk of American default, it only rises with these bailouts.

151 posted on 09/08/2008 11:14:32 AM PDT by palmer (Some third party malcontents don't like Palin because she is a true conservative)
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