News and commentary

TARP Creates Collateral Damage!

By Richard Suttmeier
Updated: Tuesday, October 14 2008 09:10:PM

It seems like every time the US Government tries to unclog the credit markets and bail out Wall Street, homeowners get the shaft, and tax payers are left paying the tab.
 
TARP does not help Main Street it helps Wall Street, at the expense of tax payers.
 
Fannie and Freddie will buy $40 Billion of Troubled Assets per Month
 
The Federal Housing Finance Agency begins its program to buy $40 billion per month of toxic mortgage backed securities – The total allowed by the Conservatorship of the GSEs is $200 billion, which will be essentially overpaying for mortgage securities containing subprime and Alt-A mortgages. Fannie Mae and Freddie Mac already own about $210 billion of the toxic waste and tax payers will be paying for more.
 
This hurts homeowners because Fannie and Freddie have to borrow from the public and add to the $1.7 trillion of debt already on the books at rates significantly wider versus US Treasuries. I thought the goal of Conservatorship was to bring down mortgage rates for homeowners on Main Street. Not when the GSEs borrow at 133 basis points above the 2-Year US Treasury, 118 above the 5-Year, 102 above on the 10-Year and 83 on the 30-Year.
 
Remember Paulson’s Little White Lie - “As the rest of our markets experienced increased turmoil the interest rate on a 30-year fixed rate mortgage has come down from its peak of 6.6 percent earlier this year to as low as 5.9 percent this week”
 
Fact – In January the 30-Year fixed rate mortgage was 5.25%. Today the rate was 6.23%. During this time horizon the federal funds rate has been halved from 3% to 1.5%.
 
The FDIC is guaranteeing new bank debt for the next three years. So the banks that forced homeowners into mortgages they could not afford will be able to borrow from the public in competition with Fannie and Freddie, which puts upward pressure on both US Treasury yields and GSE debt.
 
The Housing Market will not recover without Cheap Mortgage Money!
 
TRAP – Will be buying $125 billion worth of Preferred Stock in nine major banks. The money to do this will be raised by increasing the sizes of US Treasury auctions. To pay for toxic mortgages Fannie and Freddie will sell more debentures priced wider off US Treasuries. The debt issued and guaranteed by the FDIC will be priced higher than the GSE rates. Who loses - homeowners as mortgage rates rise!
 
The US Government has yet to focus on the root cause of “The Great Credit Crunch” - issuing mortgages that homeowners could not afford. Home prices are declining, which makes refinancings difficult. Voluntary programs are not the answer, and just don’t work.