Huge proportion of analysts are convinced that the Fed will, soon, announce a plan to drive down mortgage rates and along with the hints by the White House that the administration will “do something” about the ailing housing market, the conviction is increasing that another QE-type action by the Fed is on the way.
…and what is the real goal of such policy?
Ostensibly, Fed, and perhaps the White House, argues that by having the Fed buy up the MBS it will drive the interest rates lower, initiating refinances which will free up some disposable cash for households and the freed cash will move into consumption.
Fed recently presented an argument that refinancing is not a zero-sum game because the decrease in income that investors incur via refinance has nearly negligible impact on their spending decisions while the extra cash households get enters the economy and impacts it more via its multiplier effect.
Some doubt this and are vocal about that.
One criticism of this policy is that it may have very little impact because so many people who are current on their mortgages may not be able to refinance because the value of their home has shrunk so much that it would not satisfy the current underwriting loan-to-value standards. Unless this issue is tackled with “politically” gains in consumption that the Fed is counting on is a pipe-dream.
Others quip that the Fed will, once again, temper with the “natural” evolution of the house price discovery so the housing bottom may never be reached.
Yet others say that targeting MBS is done not for the reasons of helping the households but to bolster the bankers.
Banks are saturated with MBS paper and that, these critics say, is a drag on their balance sheets so another trillion of freshly printed dollar bills would go a long way in perpetuating corporate welfare.
In addition to 6.2 million bad loans, the banks may hold as much as 10 million additional delinquent loans that have not been booked yet so the MBS purchase program would off-load these from the banks’ balance sheet.
“Of course, the Fed’s (proposed) purchases have nothing to do with ‘driving down interest rates’ (which are already at historic lows) or ‘stimulating the economy’. That’s just more public relations hype. It’s all about inflating the prices of droopy financial assets that are eating up banks’ balance sheets,” writes editor of Eurasia Review.
Not to mention renewal of claims that the program will spring-load inflationary pressures that will, inevitably, burst sometimes in the future (buy gold trade).
Cash has already loaded up on this MBS trade, with PIMCO reportedly already in the MBS while others, like AG Mortgage Investment Trust, have issued 5 million new shares in order to use the cash to speculate in “agency securities, non-agency residential mortgage-backed securities and other target assets”.
Some, however, are talking of a possibility that MBS purchases would be scaled down from a trillion to $400-500 billion.
Still others even go as far as to warn that, with too much European uncertainty, the Fed may just shift its reinvestment cash gotten from securities already held into the MBS – a significantly smaller figure then some are betting.