Fixed Income Weekly

FOMC – Baby Steps

This week’s decision by the Federal Open Market Committee (the committee that determines the Fed’s monetary policy) did some decent market moving this week despite only being one of many baby steps to come.

So what changed from last release? Not much. The committee sees household spending expanding, compared to only stabilizing in September. The previously scheduled $200 billion in agency debt purchases will now be reduced to “about $175 billion”, due mostly to the lack of paper available. Other than that, it was a carbon copy of the statement from the September 23 release. A Barron’s article from a couple weeks ago speculated that some Fed officials were considering removing all or part of the “exceptionally low levels of the federal funds rate for an extended period” phrase from the comments. We didn’t get that much of a switch from last meeting but we are definitely a little closer now.

Fannie Mae – The Landlord

Announced yesterday, Fannie Mae will begin renting homes back to troubled homeowners who prove they cannot afford to pay their mortgage. The new “Deed for Lease” program will offer an alternative to eviction to homeowners who have their mortgage either owned or guaranteed by Fannie Mae. In order to qualify homeowners must be between 1 and 11 months late on their mortgage and cannot qualify for a loan modification. Yes. There are homeowners who are more than 11 months late on their mortgage but still living in their home. Could that be masking some problems from the housing data the market has been juiced about lately? Just a thought…

The leases will be for 12 months, after which they will try to sell the home at a higher price than they could right now. Fannie claims that it is unlikely that homeowners will be able to buy their home back after the lease expires, sighting that the home will only be offered to qualified homebuyers. In reality, the term “qualified” has held several different meanings within the credit universe during the last few years, so who’s to say that someone with a major blemish on their credit history in the last year and no down payment won’t again be considered qualified. It’s a loose term at best. My expectation is for this program to crash and burn just like the mortgage modification program.


Cliff J. Reynolds Jr., Investment Analyst