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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&doc
Id=GPS-450965-0
<https://mm.jpmorgan.com/stp/t/c.do?i=1DD2-26B3&u=a_p*d_450965.pdf*h_-3k
cnrjn%0d%0a>

* 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 US commercial banks added $51.4B worth of agency MBS in the two
weeks ended Jul 21)


Many thanks,


N


Nicolas S. Rohatyn

The Rohatyn Group

280 Park Avenue, 27th Floor West

New York, NY 10017

212.984.2901


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