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Monday, December 8, 2008

The Treasury's Asinine Announcement Boxes Everyone In

Starting with November 25th, the mortgage market has seen an increased in business the likes of which we haven't seen in about two years. Then, the Treasury announced that they were mulling a plan that would drop rates to 4.5%.

Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.

Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.

The plan was murky and it was unclear just if the Treasury could even accomplish such a plan. Yet, such an announcement gives those looking to refinance or buy yet another reason to sit on the sidelines at the time when everyone is hoping to create more borrowing.

The problem with such an announcement is that whether or not it actually happens many borrowers and potential buyers have another reason to wait and see what the market will do. Why borrow or refinance now if in the next couple months rates will just be a full percentage point lower? The latest application numbers aren't in yet, and of course it's impossible to tell just how much business will be lost as a result. The mere mention of a plan to lower rates to 4.5% gives many people a reason to sit and wait to see if it materializes.

One thing is clear. Rates were getting better. Borrowing was starting to thaw. The mortgage business was finally seeing a light at the end of the proverbial tunnel, and then we had this announcement. Now, there is another reason for borrowers to stay on the sideline.

Such an announcement also boxes the Treasury in. If they don't follow through, it could boomerang mortgage rates in a vicious upward slide. If the Treasury were to announce their intention to table such a plan, it's likely that rates would swing upwards in the aftermath. On the other hand, it's also clear that the Treasury has no clear idea just how they will pull this off. The Treasury doesn't even know for sure how much this plan will cost.

Under the proposal being pushed by the financial industry, Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac. It's unclear exactly how much the plan would cost.

It's clear that this is nothing more than an idea by the Treasury. It is, as such, not the sort of thing that should have ever been leaked. It's unclear just how serious they are about this plan and yet by leaking it, they have told the market that they are serious.

It doesn't matter just how serious the Treasury is in following through with this plan the market is now demanding it. Borrowers are now more likely to wait on the sideline, and if by chance they don't follow through, the boomerang effect will be vicious. Either way, the mortgage market has just been disrupted AGAIN by a meddling government.

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