Fixed Income Recap

Treasuries sold off today as investors took profits after yesterday’s rally. The two-year was down 5/32 of a point in price while the ten-year traded lower by 3/4 of a point as the benchmark curve was virtually unchanged on the day. A basis point represents .01%.

New issue MBS outperformed comparable Treasuries today after lagging yesterday. MBS tightened seven basis points to +150, reversing about half of the widening that occurred yesterday.

Homeowner Affordability and Stability Plan
Here are a couple bullet points from the housing plan announced today by the Obama administration.

• $75 billion to help homeowners refinance and reduce their monthly payment through non-traditional means
  
• Loans with 80-105% LTV will qualify for the program
  
• Efforts will be made to reach homeowners early. Homeowners who are struggling, but are still current on their mortgage will qualify.
  
• Sacrifices made by the private mortgage servicers will be matched dollar-for-dollar by the government.
  
• The interest rate will be modified to bring the monthly payment to a target of 31% of household gross income. After 5 years the interest rate may be gradually stepped up to the prevailing interest rate at the time of the loan modification. For example a 6% mortgage may be modified to 4%, and after five-years will gradually step up to today’s market rate of 5.15%.
  
• Private servicers will receive upfront payments of $1,000 for each loan they modify, and $1,000 per year for 3 years on successfully modified loans that stay current.
  
• Homeowners who have their loan modified under this program will be eligible for a $1,000 reduction in principal outstanding each year for five years as long as they stay current.
  
• For securitized mortgages these modifications will appear to investors as prepayments.The new mortgage will either be held by the servicer or sold in the secondary market.
  
• Responsible homeowners and renters who have chosen to live within their means will be penalized through future taxation in order for the government to reward those who did otherwise. (not explicitly noted in the text of the plan)

Preferred Stock Purchase Agreement

Today the Treasury announced an amendment to its Preferred Stock Purchase Agreement with mortgage agencies Fannie Mae and Freddie Mac. The agreement was originally formed to allow for the Treasury to inject up to $100 billion in capital in each agency, $200 billion total, through investments in preferred stock. The limits were doubled today to $200 billion each, or $400 billion total. The limits on the size of their retained mortgage portfolios were also increased $50 billion, to $900 billion each, leaving room for over $200 billion dollars in mortgage demand from the Government Sponsored Enterprises. That’s on top of the $385 billion of securitized mortgages that the Fed has left to purchase in the open market before June.

The Treasury wasn’t nearing the original limits on capital injections, total government funding may soon reach $50 billion and $16 billion for Freddie and Fannie respectively, but this was a good move to avoid questions from the market. In an environment where the government is being very unclear on many fronts, they aren’t leaving much to the imagination here. The government is dead set on keeping Fannie and Freddie strong in order to use them to strengthen the mortgage market. The solvency of the agencies is pivotal to the Treasuries operations.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst