Freddie and Fannie wind down?

The Treasury Department released a long-awaited “white paper” on 2-11-11 that calls for winding down these GSEs. Basically the Treasury wants the mortgage market to be mainly private and they feel it will take 5-7 years to transition to a new housing finance system. The Treasury said they would make sure
Fannie and Freddie have the resources they need to meet all their commitments. Note that the last three US Presidents have tried to reign in Fannie and Freddie but Congress has taken virtually no action thus far. Also, it was recently reported that last fall, the widely respected CEO of JP Morgan Chase referred to Fannie and Freddie
as "the biggest disasters of all time." Interestingly, after this “wind down” proposal, Fannie and Freddie spreads tightened. The reason was that the Treasury department wants Fannie and Freddie to shrink their balance sheets; less supply of bonds means tighter spreads, at least initially. Whether Fannie and Freddie can be wounddown remains to be seen. MBS investors, which actually determine mortgage loan rates, say mortgage rates will be much higher (say a few hundred BPs) without some form of government backing. Could politicians really handle mortgage rates of say 7% instead of say 5%, holding everything else equal?

From Brick and Associates, Inc Commentary

Inflation Watch

The head of the European Central Bank said on 3-7-11 that he is ready to raise rates because inflation is too high. (That was before Japan’s earthquake.) Bill Gross, the biggest bond fund manager in the world, dumped all of his Treasury bonds in February because he feels the rates are too low and he wonders who will buy all the Treasury debt (at today’s low rates) when QE2 is over. He said Treasury yields are artificially low by about 150BPs because of QE1 and QE2, based on expected nominal GDP growth of 5% this year.



Exerpt from Brick & Associates Commentary