- Bonds rallied yesterday a little, but have given back all that
momentum and more today, so we’re back to where we were Friday on
rates. At least oil is falling – we’re more than $18 off the high and
- There is a proposal out there being put together by a
private/public consortium of mortgage people and government regulators
that actually has some merit. It will be a couple of months before we
get the full details, but right now it appears that what we’re looking
at is a plan to increase transparency in the packaging of mortgage
loans so they can be purchased. This would add confidence to the
secondary mortgage market, increase liquidity, and probably drive down
rates, especially for good borrowers.
- This is the technical part, so skip it if you don’t care:
mortgages are packaged in large groups for sale on the secondary
market. Primary lenders have used this packaging to shed loans from
the books and obtain new lending capital. However, up to the moment,
the packages of loans have been fairly opaque; that is, the secondary
financiers were never quite sure what it is they were buying. The
packages of securitized loans were often significantly heterogeneous,
and as the market has melted down, that has contributed to the
distress, because the lending institutions that purchased these
packages couldn’t really tell what they were worth – they didn’t know.
- Some of the loans were fine, most of them, even, but many were
not. How many? Nobody knew. Was this package better or worse than
that one? Nobody knew. How much real exposure did the financier have
to market downturn? Nobody knew.
- To a large extent, nobody knows now, either, which is why the
recent spate of better-than expected earnings from servicing banks has
been such welcome news. At least we’re pretty sure the entire
portfolio isn’t going to self-destruct.
- This opacity does two things: one, it increases risk-based
pricing for good loans (20%+ equity, 720 credit, full income
documentation) while significantly decreasing pricing for bad loans,
and two, it allows lenders to make riskier loans, because they can then
package them with good ones and sell the whole shooting match as “A”
- You’re right, this is stupid.
- What this proposal would do, then, is make it much easier for an
investor to tell what he was buying, because all the loans in any given
package would share characteristics. This will increase liquidity,
especially for good borrowers, and get some money moving in the
mortgage market again. Rates will fall for less risky loans.
- Rates will, of course, rise for more risky ones, which will
emphasize things that need emphasizing, like having a job and some
money in the bank, and a history of paying bills on time. That will be
painful for some, but better on the whole for everyone.
- Congress will then step in and prohibit risk-based pricing as
being discriminatory, and the entire market will collapse. But we will
have made a good try, and that’s important.