Posted on 02/03/2012 12:59:21 PM PST by whitedog57
Here is why these investors will lose a lot of money.
Currently, Fannie Mae, Freddie Mac and Ginnie Mae (FHA) MBS are selling at what is called a “premium” above par value of 100. Let’s start with GNMA MBS.
Notice that GNMA MBS prices are trading at a premium to par and the higher the coupon rate, the larger the premium. For example, the GNMA 6.0% coupon is currently selling for 109-22. That is $9 -22 above par.
Why?
Premium prices occur when sufficient number of borrowers do not refinance, either due transactions costs or inability to refinance their mortgage. If transactions costs were zero and everyone could refinance their mortgage, the premium would fall to par (or zero). Therefore, the cost to MBS investors would be the difference between current prices (109-22 for 6% MBS) and par value (100). That is almost a 10% loss.
What is the dollar price tag to an almost 10% Greek-style haircut on MBS? According to SIFMA, at the end of Q3 2011 there were about $8.54 in mortgage-related securities outstanding, the majority of which are Fannie, Freddie and Ginnie MBS. cm-us-bond-market-outstanding-sifma Just doing a simple back of the envelope calculation, that would be 10% haircut on $8.54 trillion … or $854 billion. Now, the actual haircut calculation would be rather time consuming and could be half that amount. In any case, the worst case scenario (everyone refinances their mortgage) would cost far in excess of the CBO’s estimate. Say, $500 billion loss to pension funds, banks, personal investors, etc.
People need to realize that nothing is free (and actually quite expensive). And trying to constantly change a complex organism like the U.S. economy is dangerous and may lead to dire consequences.
(Excerpt) Read more at confoundedinterest.wordpress.com ...
Oh, great...pension funds are mostly in holes right now, so let’s go dig a bigger one! Or, maybe the bureaucrats figure the taxpayers in the states will be found to be legally required to backfill those pension promises????
No, judges will
there is precedent in judges ordering higher taxes be imposed
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