Washington D.C. November 12th

The big speech of the day...

Hammering Hank Paulson spoke on the "Financial Rescue Package and Economic Update" today. TARP developments regarding the MBS market have been long awaited/ anticipated/expected since initially promised when Congress hastily passed the Emergency Economic Stabilization Act.

Before you begin reading through Hank's statement it may be necessary to reset your economic priorities, try to take yourself out of real estate /mortgage mode and get into big picture/ global macroeconomics vitality mode.

Recall the events that have taken place in credit markets over the past 45 days, remember how capital markets and money markets reacted to these compounding shocks....your 401k may have been subject to the panic if you need further proof. Money creation effectively halted, or as the media likes to say, the "credit markets froze". Banks simply stopped lending out funds that employers needed to purchase inventory and to fund payroll accounts. This is money that that would eventually reach credit-worthy citizens who are already struggling to keep up with bills after savings have been depleted and disposable income drained. It all happened so fast and the explanations offered up were often jargon filled technical rants. To put it very simply the GLOBAL banking system was failing and needed life support.

Things have gotten a little better....short term debt yields have risen marginally and bank to bank lending rates have methodically declined. Thoughts of systematic failure have faded, allowing market participants to focus on the next step towards recovery. Those of us in the real estate and mortgage industry feel very strongly that the domestic housing market is the next biggest "to do". Rightfully so too, no real economic progress will be made until the demand for housing returns. But how do you qualify for a home with no job and no income (No Doc jokes not funny)?

Here are some important excerpts and corresponding analysis. We have broken down Paulson's speech and used exact excerpts to create a summary. We have not changed the timing of delivery, we just removed the noise. Here is the full text of the speech: http://www.treas.gov/press/releases/hp1265.htm

Remember to think big picture, this is one of if not the worst financial crisis EVER after all.

Financial Rescue Package and Economic Update

"Market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair. Overall, we are in a better position than we were, but we must address the continued challenges of a weak economy, especially the housing correction and lending contraction.

Eight weeks ago, Treasury took responsibility for supporting the agency debt securities and the agency MBS through a preferred stock purchase agreement that guarantees a positive net worth in each enterprise - effectively, a guarantee on GSE debt and agency MBS. In my view, government support needs to be either explicit or non-existent.

Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role.

With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market....the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.

The U.S. housing correction exposed gaping shortcomings in the outdated U.S. regulatory system, shortcomings in other regulatory regimes and excesses in U.S. and European financial institutions.

...it is already clear that we must address a number of significant issues, such as improving risk management practices, compensation practices, oversight of mortgage origination and the securitization process, credit rating agencies, OTC derivative market infrastructure and regulatory policies, practices and regimes in our respective countries"


Jaded views are often hard to align without going into lengthily economic detail about money supply and its relation to aggregate demand/wages (please email if you want that detail!). However we feel it is very important to remind all that this disaster bordered global systematic failure and the banking system is still on life support. In terms of the big picture, restoration of housing demand will be instrumental if the macroeconomic recovery is to be expedited.

Unfortunately bigger problems must be remedied before housing gets a front and center stage spotlight. All we can say is remain patiently positive.... if you are reading this you have made it through the worst of the crisis. Mortgage world is near the top of a long list of things to fix, so hang in there our time is coming!!!

In terms of expected pricing trends this news is fundamentally bad for MBS. Based on well formed trends and a firm technical price resistance level we expect the current downward triangle trend to continue into a narrower trading range. In order to break through this well developed resistance line some form of strong headline news would be required to justify a bullish trend. Volatility is expected to continue as short term/day trading market participants will seek to take profits as available. - Adam Quinones


Update: Between the time Adam wrote the above analysis and now, the 100-08 price range we've been tracking did indeed hold and we stay within our choppy triangle, range-bound pattern. We bounced off highs in that range and have predictably seen some late day selling. Currently we're at the 23% retracement level at 100-03 which is 17 ticks up on the day.

See Victor's previous post on lock/float considerations to see the consensus here at the MBS Blog. - Matthew Graham