The Kindness of Strangers

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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By | 2014-09-05T20:11:14+00:00 August 23rd, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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