Rates Down on $600b Fed Investment in Mortgage Bonds, China Replaces Japan As Largest Holder of US Debt

Everyone is waiting to see what Barack Obama has got planned. We already know his economic plan. It’s designed to help small businesses that make under $250,000 a year…Like General Motors and Chrysler.

$600b Mortgage Bond Investment By Fed
Seriously, this morning rates have improved dramatically the Federal Reserve and Treasury Department unveiled hundreds of billions more in money they are pumping into our economy to try to jump start lending by the nation’s banks for mortgages and consumer debt. The Federal Reserve Bank of New York will lend up to $200 billion to holders’ securities backed by consumer debt, such as credit card debt, whose issuance has come to a halt. In addition, Treasury will allocate $20 billion to back that lending by the New York Fed, and the Federal Reserve announced it will purchase up to $600 billion in mortgage backed securities that have been backed by Fannie, Freddie Mac, and their step-sister Ginnie Mae, along with buying another $100 billion in direct debt issued by those firms. Currently the 10-yr is up almost 2 points, with the yield down to 3.13%, and mortgages are better by 1 to 1.5 in price. This will mean better rates for consumers.

Foreign Holding of US Debt Growing
It is great to see some demand for US securities out there! China has passed Japan to become the biggest foreign holder of U.S. Treasuries. China led all foreign official investors in September by posting a net increase in U.S. Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six. China leapfrogged Japan, increasing its Treasury holdings by $43.6 billion to $585 billion, the Treasury report said. Japan, now the second-largest foreign owner of U.S. government debt, reduced its holdings by $12.8 billion to $573.2 billion. In addition, foreign demand for Fannie Mae, Freddie Mac and other U.S. agency debt increased from a month earlier. Purchases of long- term agency debt totaled a net $6.2 billion, compared with net sales of $8.7 billion in August.

Are Fannie and Freddie Really Government Backed?
Recently, Freddie & Fannie have been caught up in the debate over how the companies will be reshaped and even whether they will continue to exist, which has made many investors wary of buying their bonds. Treasury Secretary Henry Paulson proclaimed that investors can “bank on” the government’s promises to ensure that Fannie and Freddie will pay their obligations. But there is no explicit federal guarantee of Fannie and Freddie debt, and investors, especially those overseas, are less willing than in the past to accept “implied” guarantees or oral promises. Since September 6th, when federal regulators seized control of the management of Fannie and Freddie, they have lost significant amounts of money, with 3rd quarter combined losses of $54 billion, largely due to the elimination of tax credits no longer expected to be usable. The incoming Obama administration hasn’t announced any plan for reformulating Fannie and Freddie.

Chase’s Transition Plan for New Conforming Loan Limits
If things weren’t still confusing enough, even though the Federal Housing Finance Agency (FHFA) recently announced general conforming and high cost area loan limits for 2009, Chase will be offering an “interim” high balance program. In their memo, Chase said,

“…the revised loan limits by county and applicable eligibility criteria will not be programmed in the various Automated Underwriting Systems until mid-December. In order to bridge the gap between the retirement of the 2008 Agency Jumbo program and in the inception of the 2009 Agency High Balance program, Chase will be offering an interim program effective Wednesday, November 26, 2008 The Chase Interim High Balance loan program allows Correspondents to originate loans under the 2009 Agency loan limits prior to automated underwriting systems being updated. During this interim period, the new 2009 high balance loans limits can be used in conjunction with the 2008 Agency Jumbo eligibility criteria currently posted in the applicable product guides.”

3QGDP Down, Other Economic News Roundup
U.S equities shot up yesterday, which was nice for everyone’s 401(k)’s but not so nice for the bond market. The DOW was up almost 5%, and the S&P was up 6.47%. Even though the 10-yr was down (worse) by 1.5 points in price, many mortgage prices only worsened by .125-.250. Don’t forget that many shops, and the bond market, close early tomorrow. And although the bond market is open Friday, most mortgage companies are closed unless they are pushing November fundings, so if time is of the essence for a lock, be careful. For economic news, today we had the GDP numbers for the 3rd Quarter. Gross Domestic Product was expected to show negative growth at -.6%, but came out at -.5%. The economy contracted at a real annual rate of 0.5% in the third quarter, not at the 0.3% rate reported last month, said the Commerce Department. Later we’ll see Consumer Confidence, expected to rise slightly from last month’s low reading. Tomorrow we have Durable Goods, expected -2.5%, Jobless Claims, Personal Income & Consumption, the Chicago Purchasing Manager’s Survey, Michigan Consumer Sentiment, New Home Sales. Whew! Nothing is set for Friday.

Turkey Humor
Recently I received a parrot as a gift. The parrot had a bad attitude and an even worse vocabulary. Every word out of the bird’s mouth was rude, obnoxious and laced with profanity.
I tried and tried to change the bird’s attitude by consistently saying only polite words, playing soft music and anything else I could think of to “clean up” the bird’s vocabulary.
Finally, I was fed up and I yelled at the parrot.
The parrot yelled back.
I shook the parrot and the parrot got angrier and even ruder. So, in desperation, I threw up my hands, grabbed the bird and put him in the freezer.
For a few minutes the parrot squawked and kicked and screamed.
Then suddenly there was total quiet.
Not a peep was heard for over a minute.
Fearing that I’d hurt the parrot, I quickly opened the door to the freezer.
The parrot calmly stepped out onto my outstretched arms and said, “I believe I may have offended you with my rude language and actions. I’m sincerely remorseful for my inappropriate transgressions and I fully intend to do everything I can to correct my rude and unforgivable behavior.”
I was stunned at the change in the bird’s attitude.
As I was about to ask the parrot what had made such a dramatic change in his behavior, the bird continued,

“May I ask what the turkey did?”