Rates moved higher today for a couple of reasons. An additional $100 billion of government bonds will hit the market next week to support the government’s spending binge, and investors are again concerned about over-supply issues. In addition, producer price inflation was up an unexpectedly high 0.8% in January, sending renewed inflation jitters through the market.
Mr. Obama’s Homeowner Affordability and Stability Plan may assist as many as 9 million homeowners, and hopefully stem the tide of foreclosures and bolster property values somewhat. The plan only applies to conforming loans guaranteed by Fannie and Freddie. The idea is to modify loans in order to get debt ratios down to 38%, with the government sharing much of any resulting losses. The government’s willingness to absorb the loss is expected to make this effort more successful than previous efforts that required the lenders to absorb all or most of the resulting losses. The other key appears to be getting the loan-to-values low enough so homeowners believe they have a reason to continue making payments over and above just affordability. Previously modified loans have had surprisingly high default rates often because borrowers believed they were continuing to dump money into a depreciating asset with no equity.
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