Government siphons mortgage funds

Banks face $3.6 trillion “wall” of maturing debt: IMF — One of the most far reaching problems affecting the mortgage business is not discussed nearly enough.  Reuters reports the IMF statement that “These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources,” the IMF said.

Central banks around the world have been flooding the financial markets with liquidity. This helps considerably the re-funding of debt both public and private.

I have speculated recently that an important motivation – or, perceived benefit — of the federal government’s takeover of Fannie Mae and Freddie Mac was to give Treasury complete control over treasury and agency debt management.

I remember the urgent and critical tone as Treasury and the OMB attempted to suppress GSE note issuance in the early 1980’s.

The problem in the 80’s was characterized by the Reagan administration as “crowding out.” Treasury had large debt refunding to manage. OMB and Treasury concluded that the GSE’s were attracting fixed-income investors who otherwise would be buying Treasury notes and bonds. They had perceived that GSE competition made it more difficult and more expensive for Treasury to manage its refunding operations.

Crowding-out is back. Daniel Fuss, vice chairman of Loomis Sayles, was quoted by Forbes Magazine as having said: “There is no immediate danger to corporate credit. Eventually, however, U.S. government borrowing may begin to “crowd out” corporate borrowing. The cascade of U.S. Treasury bonds sold to pay for budget deficits will drive government and corporate yields higher.”

In a striking reversal of government’s perception of what is important for the nation, Treasury and the Federal Reserve Bank again are trying to repress or reallocate capital from housing to refunding of the federal budget deficits. It is thirty-years later and the problems are the same. Under cover of the financial markets crisis of 2007-2008, Treasury has wrested control of the largest financial markets in the county. Homeowner’s will have to do with less.

 

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