Or so says this article.
“But a larger problem here is this: a 4.5 percent primary market rate essentially implies a current coupon of 4 percent, barring some other intervention mechanism. Industry color popping around after market close on Wednesday evening suggested that such a coupon would mean that most of the traditional buyer base for agency MBS would likely head elsewhere — leaving only the Treasury, and possibly the Fed, as the sole buyers of bonds under this sort of program.
“Domestic banks will find NIM [net interest margin] offered by new mortgage bonds too low to buy them,” said one trade desk’s note, noting that the all-in cost for FDIC guaranteed 3-year bank debt is above 4 percent at the moment, and some banks are offering a 3 percent APR on 6-month CDs. “A similar reasoning goes for … overseas investors and domestic money managers … for whom these bonds will be a lot less attractive than alternative asset classes in that they will not receive enough compensation for the negative convexity risk when they buy these bonds, all else being equal,” the trading note said.
There’s another problem, too: funding the MBS purchases, which — since only the U.S. government appears likely to be buying — would require putting more Treasury debt on the market.
“If the plan relies on investors buying 3 percent Treasuries to fund 4.5 percent mortgages, one has to ask how still additional Treasury supply is going to attract still more buyers of 3 percent Treasuries,” said Jim Vogel, an analyst with FTN Financial. “Demand is not infinite, particularly when risk begins to stabilize.”
The core problem with such a plan, according to a few secondary market experts HW spoke with, is that mortgage rates have little to do with the problems facing both borrowers in the primary markets and traders in the secondary market. “Leave it to the NAR to think that if we somehow lower mortgage rates, we’re on the road to recovery,” said one analyst, on condition of anonymity. “It’s like our government is trying a see-what-sticks philosophy to this mess.”
‘It’s like more of the same poison,” said another MBS/ABS analyst, via email. “I was reading some Bernanke blather with a sentence [regarding] mortgage credit drying up for borrowers with weaker credit, and I wanted to scream AS WELL IT SHOULD!! THEY HAVE PROVEN BEYOND A DOUBT THAT THEY DON’T DESERVE MORTGAGES!’ “
I don’t know enough to hazard a guess as to who’s right on this matter but I am suspicious of any plan hatched by the National Association of Realtors and other members of my new profession.
If they extend the program to re-finances, then the freed up income might stimulate other purchases, like cars, and that might help the economy. I suppose. But creating yet another group of lucky tax dollar recipients – this time, new home buyers – seems like poor social policy, regardless of whether the plan sells more houses.