Bush Mortgage Plan: Markets Debate About Long Term Affects

While the Bush mortgage planreduces uncertainty short term, it has created considerable debate about the long-term implications, particularly for buyers of mortgage-backed securities.

Recognizing that buyers of ARM securities were anticipating receiving a higher yield (and many now will not), Raymond James noted that "if these investors believe the government can step in at any time and apply pressure to modify the terms of the loans, the risk premium on these loans in the future will increase significantly" and that "this could actually add to liquidity problems already facing the mortgage market, especially in the subprime arena."

We have certainly seen more active trading in mortgage backed securities today.

For Deutsche Bank, the effort is a confidence booster. The key question: "For mortgage related securities, the question is whether less interest income is offset by more confidence in getting principal."

David Hilder at Bear Stearns represents the consensus of most analysts I read or talked to: he viewed the plan as a modest positive for bank stocks because it should avoid some losses on foreclosures, and reduces pressure on home prices at the margin by limiting additional inventory of homes for sale.

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