Housing Doom commenter coffee just dropped this in the comments.  Twist and I are over our heads on this one.  I’ll put a few of the relevant news links up in the comments later, but in the meanwhile any assistance would be appreciated.  This is about the latest Treasury moves to force down mortgage rates.  They seem awfully radical to me.

 


From Doomer Coffee

PSA: measures prepayment risk in a mortgage back security. PSA is the implied prepayment risk model at a specific yield. It measures the risk to the investor’s cash flow disappearing due to prepayment risk.

I do not have a bloomberg, so somebody might be able to get us today’s “PSA” on the 6% mortgage back. I would not be surprised if it exploded to over 1,000 today. normal PSA is 100

Think what will happen to all the 6% mortgage back securities backed by AAA collateral and clients, 740 plus Fico and sub 80% Loan To Value? They will dump the 6% and get a 4.5% mortgage. Mortgage backs Carry a fixed cash flow. Pricing theory has it that with a 100 PSA; as rates drop the note value rises. With a very high PSA; reality is the value of the 6% MBA collapses with the rate dropping.

With a very high PSA as rates drop the value of the Mortgage back also drops as the prepayment of current mortgages rise and investors lose their interest income or cash flow due to refinancing.

The effect is Agency paper over 4.5% (5.0,-6.0,-6.5)will drop in value even as rates drop in value. Agencies (Lenders) are Hedged with short T.treasuries against long agency paper.

With the scenario the treasury is proposing lenders will get killed as their agency paper drops in value and their short treasuries will go up in value. Many lenders will be forced into bankruptcy.

Unintended consequence.

http://www.yourdictionary.com/psa-prepayment-speed

 

 


OK, guys, over to you!