US gov't now first and last resort of mortgage finance
The details of the Governmental Special Entity (GSE) conservatorship are just too much. I can barely contain my laughter at the outright mis-truths and doublespeak in use. It's not even subtle.
Not only is the government ensuring that the existing GSE portfolios don't default, but it is vowing to EXPAND them with a lot more spending! Not to worry though, once the real-estate market recovers the government will unwind its ownership. Better yet, there is no need for tax-payers to worry if the mortgage securities the government buys drop in value: since these securities will be held to maturity the government will actually stand to make a profit! It would be BAD for tax-payers if the government were to demand the same high spreads over t-bills on the mortgage securities it buys. No, it is far better for tax-payers to have the treasury purchase GSE securities for LESS than market rates. What a deal for the tax-payer!!!!
Right... If buying mortgage securities were such a no-brainer investment idea then I wonder why the government wasn't doing that long ago? And who's to say that there can't be loses, what with defaults and foreclosures, before maturity?
I especially like the bit about how the GSEs will no longer be managed with the objective of maximizing shareholder value. Now there's an idea that should have been thought of before. I am sure the tax-payers are thrilled to hear that the government really has no intention to even pretend to manage these institutions in a profitable way.
The up-shot of all of this is that the last of the building blocks have now fallen into place that makes the US government both the first and last resort of mortgage finance. Already something like 90% of all US mortgages have been made through either Fannie, Freddie, or FHA in the last few months. Now that the government is going to be making outright purchases of mortgage securities it won't be long before the US government provides over 99% of mortgage finance. With the US treasury willing to buy mortgage securities for less than rates that private investors would be willing to, then how could there possibly be any space for private finance?
Ironically, the GSE conservatorship (and the decision to EXPAND the GSE portfolios) will almost inevitably destroy the rest of the private banking system, and FORCE even more conservatorships. No private institutions can possibly be profitable now that they have to compete with subsidized government lenders.
http://globaleconomicanalysis.blogspot.com/2008/09/paulson-rolls-dice-at-taxpayer-expense.html
Not only is the government ensuring that the existing GSE portfolios don't default, but it is vowing to EXPAND them with a lot more spending! Not to worry though, once the real-estate market recovers the government will unwind its ownership. Better yet, there is no need for tax-payers to worry if the mortgage securities the government buys drop in value: since these securities will be held to maturity the government will actually stand to make a profit! It would be BAD for tax-payers if the government were to demand the same high spreads over t-bills on the mortgage securities it buys. No, it is far better for tax-payers to have the treasury purchase GSE securities for LESS than market rates. What a deal for the tax-payer!!!!
Right... If buying mortgage securities were such a no-brainer investment idea then I wonder why the government wasn't doing that long ago? And who's to say that there can't be loses, what with defaults and foreclosures, before maturity?
I especially like the bit about how the GSEs will no longer be managed with the objective of maximizing shareholder value. Now there's an idea that should have been thought of before. I am sure the tax-payers are thrilled to hear that the government really has no intention to even pretend to manage these institutions in a profitable way.
The up-shot of all of this is that the last of the building blocks have now fallen into place that makes the US government both the first and last resort of mortgage finance. Already something like 90% of all US mortgages have been made through either Fannie, Freddie, or FHA in the last few months. Now that the government is going to be making outright purchases of mortgage securities it won't be long before the US government provides over 99% of mortgage finance. With the US treasury willing to buy mortgage securities for less than rates that private investors would be willing to, then how could there possibly be any space for private finance?
Ironically, the GSE conservatorship (and the decision to EXPAND the GSE portfolios) will almost inevitably destroy the rest of the private banking system, and FORCE even more conservatorships. No private institutions can possibly be profitable now that they have to compete with subsidized government lenders.
To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009.
Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability.
Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains.
Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking.
http://globaleconomicanalysis.blogspot.com/2008/09/paulson-rolls-dice-at-taxpayer-expense.html