Treasury Weighs 4.5 Percent Mortgages, But Who Will Buy?

The U.S. Treasury is considering directly intervening into secondary mortgage markets to help push primary mortgage rates for first-time buyers down to 4.5 percent, according to a report late Wednesday in the Wall Street Journal. News of the potential plan comes on the heels of a Nov. 25 announcement that the Federal Reserve will initiate its own program to purchase up to $100 billion GSE direct obligations and $500 billion MBS backed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. The National Assoc. of Realtors and National Assoc. of Home Builders have been pushing for government-subsidized interest rates to the 4.5 percent level for months now, a HousingWire source near Capitol Hill said; the effort has included prominent companies in each field, including home builder Toll Brothers and real estate sales conglomerate Realogy Inc., the owner of the majority of Coldwell Banker and Century 21 offices, said the source, a lobbyist that asked not to be named. “Our research indicates that an interest rate deduction of just one percentage point could result in as many as 840,000 additional home sales, which would further reduce the inventory of homes by as much as 20 percent,” Lawrence Yun, NAR’s top economist, said at the group’s recent annual conference in Orlando, according to the Sarasota Herald-Tribune. Questions, questions, questions The Journal story suggested only that Treasury “would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration.” Which, of course, leaves plenty of questions unanswered. But it appears that the plan under consideration, if consistent with the lobbying efforts put forth by the NAR and others, would only apply to purchase transactions, not refis. Analysts at one large trading desk — we can’t say who, given that their note was not a formal research report — guesstimated late Wednesday that the volume of loans eligible for origination under the program could be in the range of $500 billion or so, given estimated purchase volume for next year. (Which is, as astute readers have likely noted, already the size of the announced Fed program.) But a larger problem here is this: a 4.5 percent primary market rate essentially implies a current coupon of 4 percent, barring some other intervention mechanism. Industry color popping around after market close on Wednesday evening suggested that such a coupon would mean that most of the traditional buyer base for agency MBS would likely head elsewhere — leaving only the Treasury, and possibly the Fed, as the sole buyers of bonds under this sort of program. “Domestic banks will find NIM [net interest margin] offered by new mortgage bonds too low to buy them,” said one trade desk’s note, noting that the all-in cost for FDIC guaranteed 3-year bank debt is above 4 percent at the moment, and some banks are offering a 3 percent APR on 6-month CDs. “A similar reasoning goes for … overseas investors and domestic money managers … for whom these bonds will be a lot less attractive than alternative asset classes in that they will not receive enough compensation for the negative convexity risk when they buy these bonds, all else being equal,” the trading note said. There’s another problem, too: funding the MBS purchases, which — since only the U.S. government appears likely to be buying — would require putting more Treasury debt on the market. “If the plan relies on investors buying 3 percent Treasuries to fund 4.5 percent mortgages, one has to ask how still additional Treasury supply is going to attract still more buyers of 3 percent Treasuries,” said Jim Vogel, an analyst with FTN Financial. “Demand is not infinite, particularly when risk begins to stabilize.” The core problem with such a plan, according to a few secondary market experts HW spoke with, is that mortgage rates have little to do with the problems facing both borrowers in the primary markets and traders in the secondary market. “Leave it to the NAR to think that if we somehow lower mortgage rates, we’re on the road to recovery,” said one analyst, on condition of anonymity. “It’s like our government is trying a see-what-sticks philosophy to this mess.” “It’s like more of the same poison,” said another MBS/ABS analyst, via email. “I was reading some Bernanke blather with a sentence [regarding] mortgage credit drying up for borrowers with weaker credit, and I wanted to scream AS WELL IT SHOULD!! THEY HAVE PROVEN BEYOND A DOUBT THAT THEY DON’T DESERVE MORTGAGES!” “The folks in Washington apparently have little concept of the delicacy of the mechanism they are trying to ‘fix,'” said another analyst that spoke with HW on condition of anonymity. A separate editorial at the Wall Street Journal earlier this week suggested the case for why lowering mortgage rates isn’t enough. I’d suggest to HW readers strongly that they read it. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant shares when this story was published. Additional indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.