Palmer Heenan

Ginnie Mae Extension Risk - Well, Assume Me!

I I believe proper accounting treatment would require some recognition (by the owner of the asset) of the loss that will be realized (well into the future) by the modification to a below market rate. I think by driving down the "market rates" the government is attempting to reduce the loss that lenders must recognize by making these reductions. Of course, you are right to point out that the cost will be born by the taxpayers (us). This is true whether we liquidate the properties (and ultimately the balance sheet lenders that hold them) and recognize those losses immediately, or artificially reduce rates to postpone those losses into the future (somewhat). I think the government also believes that if rates are pushed low enough it may have a chance to reinflate real estate. Probably this will come to naught as well. But such further artifices are probably the only chance to avoid taking all the medicine at once. I question how long and how much the government can continue to grow its balance sheet in this endeavor.....


On Jan 14 09:02 AM User 296970 wrote:

> extension risk is huge in this environment and much greater for portfolio
> lenders. newly originated low coupon mortgages are going to stay
> on balance sheets for a very long time; therefore, you better love
> these loans. this is also an issue with loan mods, particularly anyone
> following the fdic "mod in a box" program, which calls for lowering
> the coupon to 3% and maturities up to 40 years. if anyone knows how
> a portfolio lender can effectively fund these mortgages please let
> us know. btw, the cost of this funding for portfolio is not even
> considered in the fdic test to determine if the mod should be performed.
> low coupon, long duration mortgages were what killed the thrift industry
> when intrest rates exploded in the 1970s. if the majority of outstanding
> mortgage loans get re-written at low coupons, then the seeds of the
> next crisis are being sown as this rate environment will not last
> forever.