The Morning After-Still Just Rumors

The morning after has revealed few details of Paulson’s latest plan to save us.   In fact, more questions and concerns have reared.

Here’s what we do know.  Treasury would give us 4.5% 30-year fixed loans through Fannie and Freddie.  The two GSE’s would buy the bonds at around 4%.  Banks would sell the loans around 4.5%.   

This is a point below current market rate.  (As a historical note, rates have not fallen below 5.375% in the last 45 years).  That means Federal bucks will be needed.

Whatever will be spent will most probably be in addition to the $600 billion committed last week to buying mortgage-backed securities (MBS).  But there’s still no clearer idea of where the money might come from.

Concerns about private investors have reared.  Will they still want to buy MBS while the government floods this market with dollars and forces down the return on bonds?  Will government become the all but exclusive buyer of agency MBS?

Who will this help?  Less than the numbers might suggest.  Bloomberg quotes Rajiv Setia, a fixed-income strategist for Barclays Capital.  “Over 90 percent of the mortgage universe out there would be refinancable, but you can't force banks to lend to people. . .”

These would be agency loans.  That’s not going to help people in trouble, those facing foreclosure.  Homeowners nearing this precipice are going to have damaged credit.  They won’t qualify for an agency product. 

Same with most of the consumers in subprime loans.  They were in subprime because they couldn’t get an agency loan.

This will also mean nothing for those with jumbo loan amounts.

And one of the biggest questions is whether this was just a trial balloon floated up to see if anyone thought this might work or a genuine leak. 

If it was a leak, some have suggested that it came from one of the realtor or builder lobbyists who have been pushing for something similar.  They might be publicizing it in hopes of pushing Treasury more towards this.

Our brothers in these industries may not realize what havoc this will cause to us in the mortgage industry.  This news is disrupting loan pipelines throughout the country, as borrowers now want to wait for what may be the much better deal.

But if it was a trial balloon, I wonder if Paulson and his crew realize how all this is starting smell of desperation.  They keep trying one thing after another and nothing seems to work.  Nevertheless, it keeps costing the taxpayer untold billions.