The Big Agency Discussion (BAD) is in the bag. What did we learn?
The consensus is that the Government’s guarantee of Fannie Mae and Freddie Mac will be part of the picture for a long, long time. Bill Gross, the proverbial fox guarding the chicken coop, chaired a Treasury-sponsored conference on the housing market. At that conference he noted that without Fan and Fred, mortgage rates would be 1 or 2 percent higher, curbing demand and putting downward pressure on the housing market.
Gross, of course, benefits from any government guarantee of the Agencies. If Treasury nationalizes them, taking their debt onto the US’s balance sheet, it will create a massive windfall for owners of those bonds and for some trillion dollar bond funds.
But even if Gross is talking his book, he does have a point. The private mortgage market collapsed when thousands of AAA securities were downgraded to junk in the blink of a sub-prime eye. Now investors don’t know what to think, but once bitten twice shy, and they don’t trust Moody’s any more. They face an n-dimensional risk-matrix involving credit, interest rates, structure, prepayments, and new regulations, all of which are evolving.
An expanded government role could ease some of this uncertainty and keep rates low. But at what cost? To this point generational lows in mortgage rates don’t seem to be lifting home prices very much. If the world’s most advanced financial market needs a permanent Federal role in order to make a mortgage, we have indeed all become dependent upon the kindness of strangers.
Douglas R. Tengdin, CFA
Chief Investment Officer
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