Hunter,
We are hearing noise around Fannie and Freddie, along the
lines set out below. Have you heard anything along these lines? Just checking
for the possibility of any big surprises….
FOMC, Fannie, Freddie,
mortgages:
·
Fannie/Freddie + housing - some
more talk today about an "Aug Surprise" - recall this talk
was first around last week (see the Reuters article below that we sent around
last Thurs Aug 5). The market speculation has a few different flavors but
involves two components: 1) FNM/FRE/FHA would
automatically refi all the agency/FHA mortgages down to the prevailing market
rates (so people who are current w/their mortgages but can't refi for some
reason would be able to take advantage of the current low rates); 2)
FNM/FRE/FHA would eliminate "negative equity" for those homeowners
who have mortgages worth more than their house. Recall that a bunch of press sources (inc. CNBC, DJ,
etc) have downplayed the odds of anything this major happening (its not even
clear if such a move would be legal). Keep in mind that there is a big housing conf coming up next week (Aug
17) and some think that the White House/Treasury could launch a refi initiative
around this event. The White House made a very minor announcement
on housing today (the Treasury will devote an incremental ~$3B towards
providing housing relief for unemployed people) but this is a far cry from what
is being talked about around Fannie/Freddie.
·
Is the Fed move from yesterday
foreshadowing a move by Fannie/Freddie? Given that the
reinvestment decision wasn’t well telegraphed by Fed officials, there is
some talk that it was done in anticipation of a massive refinance wave coming
down the pipe as a result of a Fannie/Freddie
“August Surprise”. A large uptick in refinancings
would theoretically shrink the Fed’s balance sheet beyond what has been
occurring currently from normal maturities – by making the decision to
reinvest maturing MBS, Bernanke will offset the contractive effects of such a
shrinkage.
·
JPMorgan wrote about this
Fannie/Freddie spec a couple wks back: https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-450965-0
·
JPMorgan today announced the
upcoming release of the new J.P.Morgan agency prepayment model.
While the prepayment environment is more uncertain than ever (in light of
potential changes in government policy), we are recalibrating our model to be
closer to the recent prepayment experience. Specifically, we are flattening the
overall refi response (linking it to trailing HPA), shifting prepayments from
voluntary to involuntary as we capture a more efficient GSE buyout regime, and
changing the mortgage rate propagation to reflect the widening
primary/secondary spreads in a
rally. The net results is wider OAS and longer
duration across the board, with the biggest impact on higher dollar priced
bonds (Matthew Jozoff)
·
The banks are pretty weak today
for a few reasons, but in part b/c
of the worry that this refi program would harm the value of bank MBS holdings
(the narrowing yield curve is also hurting bank sentiment a lot).
Recall back to a Bloomberg article on Aug 3 that talked about how banks added
to their MBS holdings at the fastest rate in 18 months (large
Many thanks,
N
Nicolas S. Rohatyn
The Rohatyn Group
212.984.2901
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