The Fed may switch gears into riskier territory to support a plan that could push mortgage rates even lower than they are now, in an effort to spur refinances, help underwater borrowers and boost the housing market.
I know, you're tired of hearing about all these government plans that sound good in theory but do little to help homeowners. But bear with me on this one.
Since rumors of a massive government refinance plan started a few weeks ago, analysts have been trying to read between the lines to determine what's ahead.
Some believe the refinance plan will be an expanded version of HARP, rather than a broader, new refi plan. But here is one intriguing theory: The Fed will support the refinance plan by starting to reinvest in mortgage-backed securities again, including pulling money of Treasury bonds and pumping it into the MBS market.
This is from a memo written by analysts at Keefe, Bruyette & Woods, an investment bank in New York.
"We believe the Fed will effectively support this (refinance) program by beginning to reinvest the proceeds of maturing MBS back into MBS rather than into treasuries as they are currently doing. Down the road, we would not rule out the Fed employing a modified Operation Twist that would involve reinvesting the proceeds of maturing treasuries into MBS or even selling short dated treasuries to buy MBS."
It doesn't take an economist or a genius to know that investing in mortgages isn't quite the safest type of investment around. But let's leave that aside for a second and take a look back.
In January 2009, a couple of months after the financial system nearly collapsed, the Fed started purchases of $1.25 trillion of MBS bonds. In March 2009, the government launched HARP to allow underwater borrowers to refinance. The idea behind MBS purchases, followed by the creation of HARP, was to push rates lower, encourage banks to lend, and boost the housing market.
While the move helped mortgage rates, it did little to boost the housing market or help underwater borrowers.
That's because lenders ignored HARP for the most part. Even though lenders were told they could refi up to 125 percent of a house's loan value if the applicant met the criteria, many lenders refused to go beyond 105 percent of the appraised value of the property. Other issues such as second mortgages and mortgage insurance woes also stood in the way of those trying to refi through HARP.
Unless the government redesigns HARP to get rid of those obstacles, removes the 125 percent loan-to-value cap and finds a way to impose the rules on banks -- and literally force them to let borrowers who meet the qualifications refi -- any money the Fed injects in the MBS market will be a waste.
Low mortgage rates alone will do nothing to solve this housing crisis.