Traders "Giddy" Over Mortgage Moves

Never mind that the markets are showing little enthusiasm for continuing the 1,000 point rally in the Dow we saw on Monday and Tuesday.

What's important is that traders are seriously discussing whether Treasury has finally found a program that will make a difference. Some traders seem absolutely giddy about the Treasury's plan to buy $100 billion of Fannie/Freddie debt and $500 billion of mortgage backed securities.

Why the excitement? Because there is already a tangible effect in the mortgage markets. It's likely mortgage rates will drop notably in the next day or so, perhaps as much as 50 basis points (a half point). That would mean mortgage rates would go from, roughly, 6.0 percent to 5.5-5.6 percent. That is a lot.

Remember that housing is the original source of many of our problems. To date, lower home prices have not led to an uptick in home sales. Now, with mortgage rates coming down, the housing affordability equation gets even more favorable. This, along with the attendant publicity lower rates will receive, may begin to get home sales up. Home builders are rallying today.

Separately, there is also hope that the new Term Asset-Backed Loan Facility (TALF) will be a big help to consumers and the companies that service them. This program provides up to $200 b of non-recourse loans to holders of asset backed securities. These are the people that securitize car loans, personal loans, student loans.

This will be a big help to the credit card companies like AmEx and Capital One . It should also help auto loan companies like AmeriCredit and companies that give small business loans like CIT .

There is a risk here: the Treasury is printing dollars big-time, and the credit-worthiness of the U.S. government will certainly be tested in 2009. But that is a risk, obviously, that Treasury has decided to take.

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