How Sound Is the AAA Mortgage Collateral the Fed Will Be Swapping Treasuries For?
- Fed announces on March 11 that it will auction $200bn Treasuries to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) against federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS on a weekly basis, starting March 27
- Pittman: About $650 billion of subprime bonds are still outstanding, 75% were rated AAA at issuance. None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February-->AAA debt fell as low as 61 cents on the dollar. Following through would downgrade at least $120bn in AAA bonds.
- Fitch: Latest revision to 2006/2007 vintage subprime RMBS rating methodology substantially raises loss expectations: Example: A new pool with the loan attributes of the ABX.HE 07-1 index would have AAA loss coverage required of 43%, versus 31% in the prior version.
- Bill Gross (PIMCO): What should an investor do desperately trying to avoid overlevered assets, yet trapped with good Treasuries at yields inappropriately low in a mildly inflationary future environment?--> If an investor requires 5%+ yields to compensate for future inflation they can increasingly be found in oversold authentic AAA assets such as conforming F&F mortgages at 5.75%.
- Shenn: Further losses/spread-widening at Fannie&Freddie expected due to lifting of investment caps and further foray into non-conforming mortgage underwriting business (jumbo loans, subprime, Alt-A).
- Barron's: FannieMae, created to bring liquidity to mortgage market in times of need, may itself be soon in need of bailout, could well be facing cumulative credit losses of over $50 billion--> F&F stocks plunge over 10% on March 10, agency debt spreads at record highs.
