Market Analysis

Due to being out of the office today, I am pasting below Larry Baer's market commentary from this morning.  Since his commentary was posted, the market for Fannie Mae and Freddie Mac Mortgage-Backed Securities has improved this afternoon even though the 10 Yr Treasury is still down.

Larry Baer's Commentary from the Market Alert Site:

Within hours the House of Representatives is set to vote on a plan to provide a financial backstop to assure the continuing viability of the two pillars of American homeownership - Fannie Mae and Freddie Mac.  Among other provisions this bill will create a program aimed to help an estimated 400,000 homeowners with subprime home loans to refinance into 30-year, fixed-rate mortgages backed by the government.  It will also allow the GSE's to increase their maximum loan size to $625,000, or the median home price for the area plus 15.0%, whichever is lower. 

This legislation will provide for the creation of a new regulatory authority to oversee the operations of Fannie and Freddie - but limits the new regulatory entity's ability to approve new lines of business or products for the GSE's. 

Equally newsworthy, the Bush administration has withdrawn its long-standing veto threat over a measure contained in the bill that provides $3.9 billion to communities for the purchase of foreclosed properties.  A massive hurdle in the path of this legislative package has now been removed.

If, as expected, the House of Representatives votes in favor of the bill, it will immediately move to the floor of the Senate for consideration -- where it is expected to run into some delays over taxpayer cost concerns and other issues.  It's not likely the legislation will be completely derailed in the Senate -- but it may be a number of days yet before the bill lands on President Bush's desk for his signature.

It is worth noting that this legislation is a temporary measure, scheduled to automatically expire at the end of December 2009 unless extended by Congress.

The Treasury market is sagging this morning as estimates of the amount of dollars Uncle Sam will need to borrow to bailout the GSE's (should it become necessary) runs in the neighborhood of $25 billion.  I think the fear-mongering here is a bit overdone.  The Congressional Budget Office estimates that there is a significant chance - probably better than 50% -- that it will not be necessary for Fannie and Freddie to tap one-dime of this new Treasury authority - much less the whole thing. 

While this new legislation represents a bit of a gamble for the American taxpayer - those who will be ultimately called upon to foot the bill should a bailout actually become necessary - I happen to be one who thinks it is well worth it -- since the provision of this bill will go a long away to restoring investor confidence in the mortgage market specifically - and by extension the economy in general.

The Treasury is set to auction $31 billion of 2-year notes at 1:00 p.m. ET today, a new all-time record for this asset class.  They'll follow this event up with a nearly record setting $21 billion 5-year note auction at the same time tomorrow afternoon.  Until investors have a chance to digest and redistribute these new offerings (a process that takes a day or so) -- it will likely be difficult for mortgage interest rates to draw enough investor attention to make much headway in any effort to move to notably lower levels.

FYI:  The Mortgage Bankers of America said their loan application index dropped 6.2% during the week ended July 18th.  The group's refinancing gauge declined 5.6% while the purchase index dropped 6.7%.