Michael, at Click Broker, says No. He argues that "In essence the Journal is asking that one group of private enterprises (the GSEs) be slaughtered to save another group of private enterprises (the housing industry and banks)."
Are 7% Mortgage Rates too High?
The Wall Street Journal “Rising Cost of Debt Stokes Fears On Freddie’s Prospects” continues its Barron’s coordinated death march for Fannie Mae (FNM) and Freddie Mac (FRE). The cries of foreclosures, mark to market losses, technical insolvency, and bad gambles on Alt-A and subprime have not been effective enough. The GSE stock prices have been driven down, but the Treasury is not acting fast enough to satisfy the Journal’s constituency. Treasury wants Fannie and Freddie to survive, but is planning for the worst. That’s not good enough for the shorts and the GSE bond speculators!
Now for plan B: Rally the public to be worried about “high” mortgage interest rates. The kill Fannie/Freddie crowd has two arguments. The first is that housing prices cannot stabilize with 6.5% to 7% mortgage interest rates. Second, Freddie was forced to pay the highest spread to treasuries ever on 5 year notes.
In the words of a politician that caused grief for presidential candidate John McCain, there’s too much crying out there. A 7% mortgage rate is not out of sync with history. And if such a rate does not stabilize housing prices, then house prices are in fact too high. Don’t forget the retail mortgage interest rate includes insurance fees from the FHA and the GSEs which can be as high as 1.5% annually on the unpaid principal. That gives a net interest charge of 5.5%, allowing a reasonable spread over 10 year treasuries. The press tries to compare mortgage rates with the Fed funds rate – ridiculous!
The complaint about Freddie’s spread on treasuries is even more ridiculous. A 113 BP spread is not the issue. Any company that can borrow 5 years for 4.172% is doing quite well. Treasury interest rates are severely under both inflation and inflation expectations. It is the cost of insuring mortgages that is driving up mortgage interest rates, not the GSE’s cost of funds.
The profitability gained through charging high fees is precisely what Fannie and Freddie need for recovery. I would like the press to focus more on the GSE’s projected cash flow and less on their balance sheets. It is unfair to doom Fannie and Freddie for shrinking their balance sheets to survive. In essence the Journal is asking that one group of private enterprises (the GSEs) be slaughtered to save another group of private enterprises (the housing industry and banks).
Finally, let’s hear Bill Miller’s reasons for being optimistic in the press.
Disclosures: Author is long FNM and FRE.
