I should be doing a Friday Night post and as always get your requests in. Already have a couple of good ones.
I did get one interesting post on my Thought Experiment last night, but only one. It is beach weather right?
Re-Fi the World, Re-Fi the Children
You will need this song (Steve Perry's part is the BEST!) and then switch the words:
"Re-Fi the World, Re-Fi the Children;
Free rides are sure to make a brighter day;
So let's start handing"
Up front I have to tell you bond duration issues, pre-payments, held to maturity off sets and other bond stuff is way over my head and thus I cannot really comment on the nuts and bolts of today's biggest story. Luckily there are many smart folks out there that can help!
The big "rumor" that made pages all over the place was a proposal to do a blanket re-finance (re-fi) for ALL Fannie, Freddie, and FHA mortgages at the low rate of 4.5%, at least until that drops below 4% soon! I am always cautious now whenever I hear the term "slam dunk" if you know what I mean, so here is the proposal (via CR thanks to Kid Dynamite):
If it were possible to inject a significant amount of stimulus into the household sector of the US economy over the near term and this stimulus had zero impact on the budget deficit, did not require an exit strategy, did not distort the markets, and took effect almost immediately, wouldn’t it seem like a slam dunk? Such an option actually exists in the form of a change to mortgage refinancing requirements. The Fed – and market forces – have pushed mortgage rates to historic lows. However, many homeowners are unable to take advantage of the low rates because they are blocked from refinancing by a high loan-to-value ratio (LTV), appraisal problems, unemployment, and low credit score, etc. This problem could be addressed if the Government merely recognized the guarantee that already exists on the principal value of a very large portion of the mortgage market – specifically, the mortgages that are backed by Fannie, Freddie and Ginnie – and acted to streamline the refi process
The above is from a paper written by Morgan Stanley analysts (sorry no link yet) called "Slam Dunk Stimulus".
Now we will not bother talking about such things as moral hazard, fairness, or anything related because if we stop helping home-debtors the terrorists WIN!
Here is where I have to point you else where. Calculated Risk has an extensive item up on this topic from Tom Lawler which is comprehensive. Again here is the link. I will not even snippet the article as it's really too complex and well written.
Simplicity can be provided by Zero Hedge, as always, and with fun titles like:
Already Bought A 3D LCD In Anticipation Of QE "Instarefi" 1.999? You May Want To Consider A Refund
There is a great list of consequences at the link and it's also a must read.
In closing I cannot help but wonder how in the world bonds have dislocated from stocks so much, and thus 30 year mortgage rates are at 4.5%!? It almost fits too perfect. Perhaps some of the roll risk is already gone via re-fi at such low rates? Something smells bad and I have a few ideas as to what it is but I need to work on it a bit.
I would add that I have long argued low rates are now STRUCTURAL to the economy and I often have brought up that a fixed government backed mortgage rate (from 4-5%) WOULD BECOME POLICY but that's just to remind myself!
Have a good night.