I want to apologize for not posting last week, but there was not a lot for me to share. This past week was largely uneventful with the exception of the Pimco news concerning their lack of appetite for private MBS. I’d first like to offer a little background and present a broader context to view this huge news.There are several factors coming into play all at the same time here. Fannie and Freddie buy mortgages off of banks and bundle them up into Mortgage backed securities (MBS)that they sell in the form of bonds. The Federal reserve through quantitive easing has been pumping trillions of dollars into the economy through the purchase of bonds. Roughly half of these purchases were MBS (mortgage backed securities) from Fannie and Freddie.Some months the government was the majority purchaser of these bonds. This played a huge role in keeping mortgage rates at historic lows thereby fueling the housing recovery. Starting in January the Fed has started the process of tapering back their purchases with the goal of making no purchases by the end of the year. This will surely lead to continued upheaval in both the stock and bond markets as well as the overall economy. The easing will also lead to higher mortgage rates as the government tapers its purchases of MBS. So we have a situation where rising interest rates will certainly damper the tepid housing recovery and the economy as a whole will face certain struggles overall with the withdrawal of trillions of fed money.The consensus I gather is that the Fed has no choice but to bring QE to an end this year, as inflation is becoming a bigger problem than has been reported.
It is under this backdrop that Senators Johnson and Crapo have decided to try and unwind Fannie and Freddie. Keep in mind that under the direction of the FHFA Fannie and Freddie have been raising the fees that they charge in hopes of attracting private money back into the business of purchasing mortgages, it has had no effect. This is evidenced by the fact that Fannie and Freddie still account for 99% of the mortgage purchases. Now for the straw that broke the camels back, Throughout this year the government will be tapering its purchases of MBS to 0. In an essay published by Barrons, last week Doug Hodge CEO of Pimco stated “Pimco has no “appetite” for MBS that don’t have GSE guarantees, because the protections offered to investors in non-GSE backed MBS, known as “private label” securities, proved to have no teeth.” Pimco is one of the largest bond buyers in the world, but also it’s not only Pimco that feels this way, there are many firms smaller than Pimco who share this opinion, but are hesitant to speak out for fear of retribution. So we have had no one step forward in spite of higher fees to shoulder some of the load Fannie and Freddie carry to date, and now we have one of the largest MBS buyers in the world declare that they will not participate in the Johnson/Crapo system. Operationally this plan is DOA. Never mind the fact that its chances of clearing both the senate and house were hovering near zero now operationally it is dead. Just as the Pimco announcement was the straw the broke the camels of any operational hopes of the Johnson /Crapo plan, it has become more than clear that if enacted, the Johnson/Crapo plan would be the straw that broke the camel’s back of our entire economy.
With our first “joint” status conference coming up on Wed. 1pm Do not expect this week to be as calm as last, more will be revealed. Has anyone heard of possible whistleblowers coming forward? Please confirm if you have. I want to thank those who continue to reach out, we will be replying to a variety of emails and messages throughout the week. Keep the faith!