Saturday, March 22, 2008

The End of the Crisis in Mortgage Credit Markets?

From Global Insight:

The ailing U.S. mortgage credit market and housing market is poised to get a lift from a significant potential boost in lending activity by the GSEs (Fannie Mae and Freddie Mac). The ability of the GSEs to respond to the severe housing downturn had been severely constrained by: a) caps that have been placed on the overall growth of their retained lending portfolio; b) the conforming loan limit of $417,000—which effectively had frozen these lending entities out of the jumbo mortgage loan market; and c) the requirement from OFHEO (Office of Federal Housing Enterprise Oversight) to hold a 30% capital cushion over and above their usual capital minimum.

The reduction of the required surplus from 30% to 20% would unlock about $7.1 billion in capital in the case of Fannie Mae, and about $6.1 billion in the case of Freddie Mac. Given that total new mortgage credit was about $743.3 billion in 2007, the GSEs could make a significant positive impact on the flow of mortgage credit to the housing market in 2008.

A modest reduction of about 50 basis points in the risk premium on 30-year conventional mortgages, to near 200–210 basis points, would bring 30-year mortgage rates back down to a range of 5.30% to 5.50%. That could stimulate significantly more demand for mortgage loans, and the GSEs are now in a good position to meet that demand.

The big question is, can the recent Fed moves to provide significant new liquidity, unlock the credit markets, and lower benchmark borrowing costs lead to such a reduction in the risk premium? We believe they can. If we pass that important watershed in the next few weeks, it perhaps could mark the beginning of the end of the crisis in the mortgage credit markets.


At 3/22/2008 6:15 PM, Anonymous Anonymous said...

So let's get this right. The libertarian MJ Perry supports the nationalization of the mortgage markets.

1.The GSEs have been given the authority to assume, guarantee or underwrite another $2 trillion in residential mortgages given the relaxation of capital requirements and will likely control $7 trillion of the outstandings by the end of 2008. And all this with a capital base of $80 billion or 85 times leverage. That's about 70% of the residential mortgage market.

The Federal Reserve will now swap Treasuries for private label residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS). And in doing so have used up half its balance sheet of about $800 billion to date. I thought the aphabet soup acronyms in the securitization market were bizarre but the Fed is now creating its own...the TAF, the TLSF, the PDCF. What is the next acronym when the next credit contagion wave arrives on its doorsteps?

Privatize the gains and socialize the losses is the new libertarian mantra.

At 3/23/2008 8:07 AM, Blogger Jas said...

Pardon my lack of cognition, but am still not able to grasp completely the economics of so called 2008 recession.

As I see it, the core of condition lies entirely with the domestic consumers of US. Others are effected as this consumption is so high that US consumer is infact also the world's largest consumer in entirety. So if they decrease consumption, every big nation feels the burnt on fiscal revenue. Also due to the transaction base being dollar, even monetary health suffers for all nations (even though their own currency gets strengthened!). Fed rate cuts brings the liquidity in the system, which already is facing the inflation. Now how to make sure that the excess money is going in paying off debt rather than higher consumption level? or should it actually go to consumption to make world stable? Shouldn't the FD interest rates be increased to suck off the excess of money from the people who have disposable money?


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