Published On: Wed, Sep 21st, 2011

Did the Fed Just Grease the Skids for Obama’s Refi Plans?

WH and Fed Sleeping Together
For me, the most significant development from the Fed’s announcement is a change in policy where the Fed will re-invest proceeds of maturing MBS securities in new issues of Agency MBS paper. Prior to today, the Fed re-invested principal repayments in Treasury bonds.I wrote about the possibility of a mega mortgage ReFi by Fannie and Freddie (here and here). I (and many readers) pointed to an obvious flaw in the ReFi story. If a Trillion or so of mortgages were rapidly prepaid, then who would buy all of the new (much lower coupon) mortgage paper?

Now we have the answer. The Fed will put the new MBS paper back on its Balance Sheet, $ for $. There will still be many bondholders outside of the Fed who will get prepaid much faster than they had assumed. Most of that is in pension/bond funds. No one cares about them.

I think that Treasury will announce the plans for a Mega Refi in the not too distant future. It could come this weekend or next week. Obama will wait just enough time after the complex Fed decision so that 99% of all people don’t connect these two dots.

In that 1% will be Republicans. They are going to be mad as hens tonight that Bernanke ignored their last minute plea not to play more monetary games. The authors of that letter, McConnell,Boehner, Kyle and Cantor are really going to be peeved. Not only did the Fed step further on the gas, they greased the skids for an Administration’s plan to ReFi mortgages.

It’s not at all clear that the Fed’s latest move is going to accomplish a thing. I’m not sure that the Big ReFi is going to be such a success either. But that doesn’t matter.

What’s important about this is that the Republicans will respond. They will not give Obama another leg up with his one-year stimulus program. Any chance of that went up in smoke with the Fed’s VERY political decision on MBS today. 

Can you say,“Collusion”?This is a real circus now. In this one the bears aren’t dancing.They’re fighting. The claws are out and it’s going to get bloody.

About the Author

- Bruce Krasting has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work. In January 2009, he started writing his blog, Bruce Krasting. From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments.They expressed their views in global bonds, currencies, stocks, commodities and derivatives. He closed the fund and retired in 1995. Bruce has also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp. He hold a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY. We are very happy that Bruce has allowed us to post his articles here on These New Times, and we think you'll agree that his insights are detailed and often brilliant and he has a easy, readable style. You can read his blog everyday here