Go back a week to an article in the NY Times (Link). The guts of this story is that the Administration is working on a plan to Re-Fi residential mortgages on a massive scale.

When I first read this, I ignored it. The scope of the proposal was too large. There was also (IMHO) a fatal flaw. The thinking was that the jumbo ReFi would be made available to only those who had a mortgage that ended up with either Fannie or Freddie. I ask the question, "What about those poor odds and sods who have a mortgage with a community bank?” Do they get nothing while those who owe F/F big bucks get a break? Where is the fairness in that result?

Oh do c'mon.

Look, Bruce makes a decent argument for sourcing and such, and Zerohedge has been beating this drum too, but let's talk about what really happens if this occurs.

First, let's look at the article and presume a few things.

1. We could wind up with a 30yr interest rate somewhere around 4%.
   
   
2. Most of the higher-interest loans are far into their amortization (or they would have refinanced already)

Ok, so first off, if we do this, follow Bruce's logic but remember one thing - not only does this saddle people with a new, no-amort mortgage that they now have to service from zero, but in addition it does a whole bunch of other not-so-nice things.

• It prepays the existing MBS.  That's "good" for the homeowner.  It's disastrous for the MBS holder, who gets taken out of a position that was yielding 5 or even 6% and is replaced with something at a quarter to a third less!  For the performing loan it's a big problem, and that "problem" falls right on pension funds and similar investors.  They will get screwed badly and there is no reasonable way for them to make it up.
  
  
• It probably impacts MSR valuations and not in a good way.  That's bad too, this time for the banks, which count those as "money good" and are a very valuable asset. 
  
  
• It makes "fixing" the GSEs difficult - or impossible.  Remember that a lot of these loans are underwater.  Nobody's going to take them at the coupon everyone wants to see without a guarantee by the government, which means the GSEs now become permanent wards of the state.  Can that objection be overcome?  I don't know - that could be a lot of fun politically.

The premise here is that this "permits" a huge prepay of the Fed balance sheet, which it can then roll into Treasuries.  But why would The Fed want to do this?  Well, it might to get them off its balance sheet and fund the Federal deficit, but remember - the Fed likes the money and so does Treasury from the "rebates", which would end.  Further, I wouldn't call a 10 year Treasury rate of 2.2% (as of today) something to be worried about when it comes to deficit spending!

It sounds entirely to fantasmagorial to me, and at best it gets you 1/2 of 1% of GDP if the figures provided are correct.  That's not much, and I bet the damage done on a mark-to-market basis for pension funds and similar holders far outweighs that consideration.

You're free to believe in this one if you want, but not only do I not buy it, but I don't think it does anything of value for the economy or the homeowner, and it most-certainly does screw pension funds - including federal and state pension funds.