Last Friday, we discussed at length the two factors that have recently driven mortgage rates higher. To recap – in addition to the ever present threat of inflation, the main driver was a spiral of de-leveraging that occured as financial institutions were forced to sell high quality mortgage-backed securities in an attempt to raise capital. This "too many sellers, not enough buyers" situation was driving prices down, and mortgage rates up – in many cases dramatically.
So now the Fed has stepped in with a new vehicle, the Term Securities Lending Facility (TSLF), through which they will lend to financial institutions who pledge Agency (Fannie/Freddie) and other AAA rated, private label mortgage backed securities, such as Jumbo and Alt-a Loans, as collateral.
How specifically, might this help mortgage rates? From the WSJ:
By taking some of these securities on its own books, the Fed is seeking to make its primary dealers — the network of 20 Wall Street firms with which it typically does securities business — more comfortable buying them from their own clients. It hopes this could lead to higher prices and thus lower yields on the mortgage-linked debt. A decline in those yields could help banks offer lower interest rates to prospective homebuyers.
That there is the kicker: The street has been shunning anything mortgage related – even plain-vanilla super high quality stuff. As a result, mortgage rates have risen, so now The Fed is trying to shore-up the mortgage market by becoming the buyer (lender, really) of last resort, so that the market can resume functioning normally, which should put downward pressure on rates.
Of course, we still have elevated inflation levels to deal with, and the credit crunch (which the Fed has now twice tried to kill-off) could resume in full. Terminator style. So it remains to be seen whether this new initiative will be a lifeline, or a noose.
So far, the rapid rise in rates has been halted. Long term fixed mortgage rates have improved .125%-.25% (rolling back about 1/3 of the recent rise) since last Thursday’s high-water mark. That is progress, to be sure, though historic trends suggest they should be lower still.
Other great insight and commentary on this all over the place. Here’s a few takes we found particularly colorful:
"So basically the Fed is going to be swapping Treasuries for dubious securities, in an attempt to give the market a REALLY BIG slap in the face. I understand what they’re doing, and might have done the same in their place. Still, all I can say is Wheeeee!"
Krugman at the NYT [Sterilized Intervention]
"The Fed’s move today to lend up to $200 billion against mortgage backed securities comes as close as one can without an act of Congress to affirming the implicit Federal guarantee of Freddie Mac and Fannie Mae debt."
Yves Smith at NakedCapitalism [Fed to the Rescue of Fannie, Freddie]
"The good news is this will help brokers and banks; the bad news is it will do nothing to help the Housing market, or stop the decline in House prices. Nor will it help resolve the inverted pyramid of derivatives that sits atop Housing. And, one has to believe it will only add to inflationary pressures."
Barry Ritholtz at The Big Picture [Fed Rally on Garbage Paper!]
"…it is somewhat ironic and humorous that the Fed is relying on the same ratings agencies whose laxity and complicity helped get us to this sorry juncture in the first place."
John Jansen at Across the Curve [Some Opening Comments]