In "Face-off" my mission is identifying and writing about the best sources on a topic. I seek out expertise and explain the arguments. This is in sharp contrast to most others who purport to be experts on nearly everything. By comparison, my claim is quite modest!
Background: The Fed Ends Purchases of Mortgage Securities
After the fall of Lehman the market for mortgage securities evaporated. Much to the surprise (and dismay?) of the bearish punditry, the Fed stepped into the gap. It was pretty obvious that there was a temporary need to support mortgage lending.
This set up a debate. Was the Fed merely delaying the inevitable or was it sound public policy?
Since housing is crucial to the economic recovery, this is an important issue. Since the home buyer's tax credit is also ending, the threat to housing is even greater.
The ProtagonistsReaders should understand that the protagonists in "Face-off" do not know that they are participants. They have not seen the commentary of their putative opponent. This is a device for making stark contrasts in opposing viewpoints about issues. Anyone who is cited is most welcome to join in the discussion. I guarantee a complete opportunity for rebuttal. In fact, that would be helpful to everyone.
The Pessimist
Mortgage specialist Barry Habib, in this April 5th commentary featured by John Mauldin (and the bearish blogging network) raises a number of key points:
- The Fed has $1.25 trillion in mortgage securities. If these were $100 bills, the stack would be 850 miles high.
- Fed purchases pushed down rates, perhaps by 0.5%.
- It is all part of a carry trade.
Check out the full article, but the basic theme is that it will all end badly. The conclusion from the article refers to the movie Dumb and Dumber.
The Optimist
Brian Wesbury and Robert Stein of First Trust have been aggressively bullish on the economy and the stock market. Anyone with this perspective should be worried about the withdrawal of stimulus and other government programs.
Here is their take on the end of the Fed purchases:
- The Fed will not be buying, but it is not going to "dump" existing positions.
- A calculation of net new borrowing (new purchases minus debt retirement) shows only a need for $15o billion or so -- nowhere close to the bearish number.
- Housing prices and the labor market are coming around.
Check out the entire analysis here.
Conclusion
Our initial take was an advantage to Brian Wesbury, mostly because it was the careful marginal impact analysis that we favor.
There is now more information, enough for a "round one" verdict.
Bespoke Investment Group has been tracking mortgage rates since the end of the Fed purchases. In stark contrast to the predictions of disaster, the market has shown significant interest in this debt.
Readers should check out the full article for the typically excellent analysis from Bespoke.
There is another positive sign, the possible resumption of securitized jumbo mortgages. The inability to get mortgages for expensive homes has paralyzed potential buyers in that market. With the cap on government lending, these borrowers need a private market.
Securitization of mortgages now has a bad name, of course. My view is that it was a good idea, but was poorly implemented. There are many investors who would now happily embrace sound mortgage securities supported by those with good credit scores buying expensive homes.
To summarize, the early round in the mortgage debate goes to the bulls. Needless to say, we should all watch very carefully.
