Tuesday, February 10, 2009

Mortgage investors have been keenly attuned this morning to Treasury Secretary Timothy Geithner’s unveiling of a revamped rescue plan for the nation’s financial system.
The renamed “Financial Stability Plan” will, among other things, devote $50 billion to try to stem home foreclosures.

In addition, the Treasury Secretary said a public-private investment fund will be established, seeded by government money, to provide a mechanism that will allow banks to clear “toxic” loans from their books so that they may resume lending to small business and consumers.
The legislation includes significant new regulation and disclosure requirements banks will comply with to ensure that tax-payer money is being used to its highest effect. It all sounds good – but mortgage investors will likely remain skeptical until these strategies have been implemented to until there are actual measurable results to consider.

Until the nation’s banking system returns to health – the success of the $800+ billion financial stimulus package currently working its way through Congress will have little chance of success. Without the ability to borrow to invest in new business projects, or continuing education, the purchase of homes, cars and countless other goods and services -- the American consumer will not be able make their vitally important contributions to the revitalization of our economy.

Mortgage investors nervously await the results of this week’s record breaking government borrowing spree. The Treasury is scheduled to borrow $32 billion in the form of three-year notes today (event concludes at 1:00 p.m. ET), followed by $21 billion in 10-year notes tomorrow and concluding with $14 billion of 30-year bonds on Thursday. The Treasury has said it plans to borrow $1.5- to $2.5-trillion in this fiscal year. It is important to note that this estimate does not include the cost of the proposed federal stimulus package on its way from Congress, currently valued in the neighborhood of $800 billion, and the ultimate cost of financial rescue package for the banking system outlined earlier today.

As you might imagine, the United State’s perceived creditworthiness is beginning to be tarnished by the global investment community’s worries about the unprecedented total costs stemming from our bailout programs.

The trend trajectory of mortgage interest rates for the next week or so will largely depend on overseas demand at this week’s three Treasury auctions. If demand is strong -- mortgage interest rates will likely remain steady to fractionally lower -- while poor demand will almost certainly lead to fractionally higher mortgage interest rates before the week is over. I’ll provide an update on the result of each of this week’s Treasury auctions as soon as possible following their conclusion.