U.S. Treasury to Make Open Market MBS Purchases

While market participants work overtime to digest every detail of the government's takeover of Fannie Mae (FNM) and Freddie Mac (FRE), Globest.com is reporting that one aspect of the plan is a new program in which the U.S. Treasury, at the discretion of Hank Paulson, will purchase agency mortgage backed securities on the open market, in addition to the direct portfolio acquisitions that the agencies themselves make.

"There are a number of missing blanks that Treasury has to fill in with this plan," said Dave Baird, national director for multifamily for Sperry Van Ness, "but I think it is clear that this will add additional and much needed liquidity to the capital markets." There is some speculation that a stepped-up Treasury presence in the capital markets could even provide an indirect positive boost to the CMBS market.

That latter theory may be a bit of a stretch, but given the unprecedented maneuvers by the government, not to mention the capital market environment as a whole right now, nothing is beyond speculation. "While we haven't yet had indications that CMBS is on the table, we're reviewing all developments and can comment as additional information comes to light," said Kenneth Reed, managing director of the Commercial Mortgage Securities Association.

But "what we do know," he continues, is that the "Treasury said it's committed to purchasing GSE mortgage-backed securities, though the size and timing of those purchases are left solely up to Treasury. As for the scale of the program, or potential increases in MBS purchases, that issue would depend on the housing markets and overall market conditions." So, it sounds like Hank Paulson is trying to make sure that the markets know he has plenty of extra rounds left for his now smoking-hot bazooka.

Under the plan, Fannie Mae will acquire GSE-backed MBS in the open market through designated independent asset managers who will be operating on behalf of the government. Fannie Mae's plans are set to go into effect later this month, though the size and timing of the purchases are subject to the discretion of the Treasury Secretary and the scale will be based on developments in the capital markets and housing markets. Treasury can hold these assets to maturity and, based on mortgage market conditions, may make adjustments to the portfolio. Treasury will make available information on purchases through this program in the Monthly Treasury Statement.

At a minimum, it is now clear that capital market financing for multifamily will remain available, said Adam Petriella, a Los Angeles-based VP of Investments and Capital Markets for Marcus & Millichap. "While the sour home loans need to be cycled off their books, multifamily stands out as a star," he says.

Given this addition to the government's already unprecedented interventions in the markets, and the market's action Tuesday, it seems the only reliable short candidate left may be Lehman (LEH). When the Lehman shoe finally drops, which may happen as early as Wednesday morning, it will relieve a lot of the remaining uncertainty out there in mortgage land.

Comments

[buyitcheap:]

Who will they buy the MBS paper from first - foreign governments/ agencies? If so, will they give cash or trade treasury bonds? either way, not terribly encouraging...

2008 Sep 10 08:06 AM

[steveballmer:]

This is going to end up very badly! We all know how efficient the government is and what wonderful managers they are.

2008 Sep 10 08:11 AM

[history rep...:]

this has already ended up very badly, due to the private sector managers in the banks and brokers who snorted subprime paper like crack.

the gvt screwed up big time all right - by buying into the voodoo economics of 'regulation is bad'. any common sense regulatory action would have reined in the insane behavior of the bankers long ago.

2008 Sep 10 08:20 AM

[schminkie:]

hasn't the government 'purchased' such securities in their repos? haven't they had a securities portfolio for years in connection to the repo market?

2008 Sep 12 02:21 AM