Since when did $3.5 Billion become “no big deal?”

The announcement came out that the Treasury is going to be giving $3,500,000,000 to GMAC.    It’s pretty much being treated as a non-event in the markets.  

So what does this tell me?   A couple of things:

• $1 Billion sure ain’t what it used to be.
• If the government thinks that they need to give any additional funding to a mortgage company, that tells me that the government doesn’t think this is done yet.

I’ll have more as time goes on.

Tom Vanderwell

Treasury plans to inject around $3.5 billion into GMAC | detnews.com | The Detroit News

The Treasury Department plans to announce as early Wednesday afternoon that it will give GMAC Inc. around $3.5 billion in additional capital, sources told The Detroit News.

Detroit-based GMAC and the Treasury Department have been in talks for months to finalize the amount of money the company would receive. The Treasury Department said earlier this year it would invest up to $5.6 billion more in GMAC — on top of $13.4 billion GMAC has received over the last year.

Technorati Tags: GMAC, Treasury, Bailout

‘Twas the Night Before Christmas

and all through the country, people were paying more attention to Christmas than they were to the government and to the financial mess that is making our country struggle.

So what did the Treasury do?   They did two things:

• They expanded the nationalization of Fannie Mae and Freddie Mac from $200 Billion each (that’s $200,000,000,000) to an unlimited amount of funding.   In other words, the US Treasury just handed their checkbook to Fannie Mae and Freddie Mac.
• They did it on the day when no one was watching and they did it 9 days before it would have required congressional approval.

How nice and how timely.

Nothing to see here, move along, move along……

Tom Vanderwell

Heard on the Street: Fannie and Freddie – WSJ.com

That was a nice holiday gift to taxpayers.

As expected, the Treasury on Christmas Eve increased the amount of money it can plow into Fannie Mae and Freddie Mac to keep them solvent. Before, the U.S. had pledged up to $200 billion to each. Now, over the next three years, the Treasury can spend as much as is needed to prevent their net worth going negative. Such a change would have required congressional consent after Dec. 31. Given that each U.S. household had effectively committed $3,800 to both firms, the Treasury should have waited till the New Year so the people’s representatives could have had their say.

Technorati Tags: Fannie Mae, Freddie Mac

Okay, I’ve got a question…..

The Treasury just spent $4 Billion in cash to give to State Housing agencies to develop new affordable housing.   This makes me wonder…..

• Haven’t prices fallen in almost every area of the country (though some more than others?)
• Don’t almost all areas of the country  (though some more than others), have too much inventory?
• Didn’t we get into this mess, in part, by encouraging too many people who shouldn’t be homeowners to buy homes?

Things that make you go “Hmmm…..”

Tom Vanderwell

Treasury Spends $4.1bn on Affordable Housing Programs : HousingWire || financial news for the mortgage market

The amount of American Recovery and Reinvestment Act funds distributed to state agencies to promote affordable housing is running at nearly $4.1bn after the latest round of payouts, the Treasury Department said.

Treasury launched the program in May to provide cash payments in lieu of tax credits to state housing agencies to spend on the development or renovation of qualified affordable housing. The state agencies then distribute the funds to developers through a competitive bidding process.

“By uniting with state housing authorities, Treasury has made available more than $4bn to jump start housing development in communities around the country,” said Treasury deputy secretary Neal Wolin. “That investment has already resulted in hundreds of new construction jobs and new housing units for families in need of affordable alternatives.”

This probably means interest rates won’t go down….

Let me explain:

• As part of an effort to stimulate the economy, the Fed said that they were going to buy $300 Billion in Treasuries (and a substantial amount of Fannie and Freddie’s debt too.).
• The $300 Billion will be “used up” next month.
• It appears that they are going to stop buying Treasuries at that point.

Now a couple of “questions” that raises:

• When they said they’d buy the $300 Billion, they also committed to over $700 Billion in Mortgage Backed Securities from Fannie Mae and Freddie Mac.  So this is only one part of the equation.  How big of an issue will it be to the rates?
• When they announced that they were buying them, rates plummeted.   Does that mean they are going to go up when they stop?  Probably but it’s not guaranteed.

When you look at the law of supply and demand and combine it with the graph below that shows how much the Fed has spent, there’s one thing that becomes clear to me:  It’s not possible to take a buyer out of the Treasury market who has been spending that kind of money without it having at least some impact on Treasury rates.   And we all know that Treasuries and mortgage rates aren’t linked in “lock step” but they do tend to follow the same general path.

Does this guarantee that rates are going up?   Nope, but it reduces the chances of them going down.    The Fed’s meeting ends at 2:15 Wednesday.   Look for more at that point on what the Fed says about Treasury purchases and what it means.

Stay tuned,

Tom Vanderwell

Calculated Risk: Fed Poised to Halt Treasury Purchases Soon

The Fed has been a steady buyer of Treasury securities. It appears this program will end in September.

From the last FOMC statement:

[T]he Federal Reserve will buy up to $300 billion of Treasury securities by autumn.

From Bloomberg last week: Fed Set to End Purchases, Two Former Governors Say

The Federal Reserve is set to halt its purchases of up to $300 billion in U.S. Treasuries in mid- September as scheduled, and will probably announce the decision next week, two former central bank governors said.

The Federal Reserve

Treasury Weighs 4.5 Percent Mortgages, But Who Will Buy? : HousingWire || financial news for the mortgage market

Paul Jackson has some additional “input” on what’s happening with the new “plan” that is being floated.   More from me on the bottom….

……Which, of course, leaves plenty of questions unanswered. But it appears that the plan under consideration, if consistent with the lobbying efforts put forth by the NAR and others, would only apply to purchase transactions, not refis. (emphasis added by me)

Analysts at one large trading desk — we can’t say who, given that their note was not a formal research report — guesstimated late Wednesday that the volume of loans eligible for origination under the program could be in the range of $500 billion or so, given estimated purchase volume for next year. (Which is, as astute readers have likely noted, already the size of the announced Fed program.)

But a larger problem here is this: a 4.5 percent primary market rate essentially implies a current coupon of 4 percent, barring some other intervention mechanism. Industry color popping around after market close on Wednesday evening suggested that such a coupon would mean that most of the traditional buyer base for agency MBS would likely head elsewhere — leaving only the Treasury, and possibly the Fed, as the sole buyers of bonds under this sort of program. (emphasis added by me)

Treasury Weighs 4.5 Percent Mortgages, But Who Will Buy? : HousingWire || financial news for the mortgage market.

Okay, Tom here again.   A couple of thoughts:

1. Click on the link and read Paul’s entire article.   There are a lot more questions than answers.
2. If he’s right (and Paul is usually right) and this pushes other investors/buyers elsewhere, where would they go?
3. If the Treasury and the Fed are the only buyers of bonds under this program, how are they going to come up with the money to buy them?
4. If they indeed are the only buyers, then are we effectively nationalizing the mortgage industry?
5. Will a rate drop from 5.5% to 4.5% be enough to persuade people to go out and borrow more money and buy a new home?   My gut feeling is that some of people who are on the “fence” will consider it but not enough to make a substantial difference in home sales.

Stay tuned…..

Tom Vanderwell

Treasury may set mortgage rates at 4.5% to boost sales – MarketWatch

WASHINGTON (MarketWatch) – The Treasury Department is contemplating a proposal that would cut mortgage rates for new loans for homes, according to the Wall Street Journal.

The plan would employ Fannie Mae to offer mortgages with rates as low as 4.5%, roughly 1% lower than current rates.

The measure is under consideration as part of the Treasury Department’s continued effort to limit foreclosures, which has been at the core of the financial crisis. The plan would seek to revitalize the financial market without bailing out homeowners and lenders, the Journal reported.

As part of the proposal under consideration, Treasury would buy mortgage securities backed by Fannie Mae and Freddie Mac, in addition to those guaranteed by the Federal Housing Administration.

Fannie Mae and Freddie Mac guarantee a significant chunk of all new mortgages in the United States.

Treasury may set mortgage rates at 4.5% to boost sales – MarketWatch.

Okay, not to rain on everyone’s parade, but let’s take a logical look at the numbers and the statistics behind it.

1. What’s the only way possible that I’m aware of to lower mortgage rates?  By raising the price of mortgage backed securities which lowers the rates on them.   Lower rates on mortgage backed securities equals lower mortgage rates.
2. How do you increase the price of mortgage backed securities?  The only way that happens is by increasing the demand for them.
3. How do you increase the demand for them?  Have the government step in and buy a HUGE (I’m talking many many many zeroes!) amount of mortgage backed securities off of Fannie and Freddie.
4. How is the US government going to come up with that money?   All joking about printing presses aside, in reality, they are going to have to borrow the money.
5. How do they borrow the money?   By issuing a LOT of US Treasury bonds to finance their purchase of mortgage backed securities.

So, what happens with the price of US Treasuries if suddenly there’s another $1 Trillion on the market?

• Demand stays the same.
• Supply goes way up because the government is flooding the market with more debt.
• Price goes down because the supply demand balance is tilted out of adjustment.
• Rates go up.

I was talking to another blogger this afternoon and he said it quite well.   We have a supply problem.   There is simply too much debt floating out there to work the way that Hank and Bernie want it to.

So far, the market has shown that they would rather earn less (frankly close to zero) and invest in US Treasuries than they would invest in mortgage backed securities.  Given the history of Fannie and Freddie recently (how many billions did they lose in the 3rd quarter?) I’m not sure anyone can blame them.  Can you?

So, we’ll have to see how the details pan out, but I’m not optimistic that what the plan is proposing will actually work.  It might actually backfire and due to the increases in government borrowings have a reverse effect and keep mortgage rates higher.

Stay tuned, it’s going to be an interesting ride!

Tom Vanderwell

Breaking News! The US Treasury Turns Down Bailout Request!

Okay, so it’s not really the whole story.   The Treasury did say NO to GM’s request for $10 Billion so that they can buy Chrysler and eliminate thousands of jobs.

But, in reality, the Treasury said, “No, don’t take it out of our left pocket (the one we’ve reserved for banks) but take it out of the $25 billion bailout that we’re working on for the entire automotive industry that was supposed to be for making more fuel effecient cars.  Instead it’s for bailouts now…..

Good grief, when are we going to say, “Enough is enough, we can’t be the banker of last resort for everyone!

Tom Vanderwell

The Treasury Department has turned down a request by General Motors for up to $10 billion to help finance the automaker’s possible merger with Chrysler, according to people close to the discussions.

U.S. Rejects G.M.’s Call for Help in a Merger – NYTimes.com.

Now It’s Official: Treasury Can’t Influence How Banks Use Cash Infusion

Treasury operatives have admitted, despite Henry Paulson’s protestations to the contrary, that the government can only hope for the best in how the nine banks given a collective $125 billion cash infusion early in the week make use of the loot:

Treasury Secretary Henry Paulson persuaded nine major U.S. banks to accept $125 billion in government investment. Getting them to lend it out may prove a tougher sell.

via naked capitalism: Now It’s Official: Treasury Can’t Influence How Banks Use Cash Infusion

Okay, does this make anyone a bit concerned about our government?   They just gave $125 Billion to 9 banks, took some stock in the banks and said that this is going to solve our problems.

Oh, but we can’t control what the banks are going to do with that $125 Billion?   So the banks can either sit on the money to keep themselves stable or they can lend it out, it’s up to them?

I’m not sure that’s going to accomplish what we want it to…..

Tom