Monday Market Commentary: ‘Treasury Mac’ Edition

by Alex Stenback on September 8, 2008

Treasury_macIt would be an understatement to say that the big news this week is the takeover of Fannie Mae and Freddie Mac.

There is, of course, excellent coverage on this everywhere. On Saturday, we actually did a short interview with KSTP to talk about the to-be-announced takeover for the 10PM broadcast. 

We won’t spend too much time parsing the particulars, others will surely do this better and more comprehensively (see the related links at the end of this post,) but basically the deal amounts to this:

In the near term, with this takeover (or, more properly, conservatorship) the Federal Government is acting as the ultimate backstop.  They will (as necessary,) take an equity stake in Fannie/Freddie, wbuy Fannie/Freddie Mortgage Backed Securities, and have set up yet another short term lending facility to ensure the Agencies have access to funds.

The broad intent is to ensure liquidity, stability, and security in the housing finance markets for the foreseeable future, and clear up any doubt as to whether and what the Federal Government’s role in and relationship with the agencies is.

At the street level, this means mortgage rates will fall.  With (now explicitly guaranteed) mortgage bonds trading at a significantly higher yield than a comparable treasury security, money will flow out of ‘traditional’ Govt debt, and into Fannie/Freddie Mortgage bonds as investors chase better returns – this additional buying will push mortgage rates lower, and treasuries higher.

So in that sense, this is good news – rates will fall.  Though once the market has ‘re-calibrated’ based on this new reality, which should work itself out in a few days or weeks, mortgage rates will continue to shift based on the same macroeconomic factors that have always driven them.

Beyond that, we expect that the tightening of mortgage guidelines and standards will continue on the same trajectory – perhaps accelerating somewhat – as before.  Defaults and losses will continue to narrow the scope of what constitutes an investment quality mortgage.

And of course, all sorts of open questions about the future form and shape of Fannie & Freddie (this is not envisioned as a permanent change to our housing finance system,) how this impacts taxpayers, the treasury, etc. etc. etc. are still to be answered, so we will follow this as it develops.

Related:
Press Conference Videos [Calculated Risk]
As always Calculated Risk covers this stuff like a blanket, be sure to stop by.
Various Posts by John Jansen at Across the Curve [ATC]
Excellent series of posts on the meaning and import of the takeover
Timeline of the Takeover [WSJ]
The first of what will inevitably be many re-tellings of how and why this came to pass.

{ 2 comments… read them below or add one }

Joshua Dorkin September 8, 2008 at 12:56 pm

I love the new logo . . . maybe big govt. will take your suggestion, merge the two, and rename.

Adam September 8, 2008 at 5:09 pm

The question remains, to what extent will the government use its powers to pursue those who saddled Fannie and Freddie with all of this sour tasting debt. There is clear fraud across a multitude of these mortgage products, including brokers, applicants, and investors. Fannie and Freddie, or should I say, the US Government, should not be expected to guarantee, or payout on any losses incurred from these criminal activities.

If an applicant obtained an Alt-A loan by lying about their assets, they should not be able simply walk away from the loss through foreclosure or bankruptcy. The problem is, prosecuting 4 million people may take some time.

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