The Treasury is artificially pricing out the risk of a mortgage and transferring it to the tax payer, the public. The Treasury is not a public entity. Bernake is should not be able to buy mortgages at prices determined by him to be fair at tax payers expense.

Correction: In an environment of falling interest rates, the banks’ short Treasury position will create losses for their long/short straddle strategy.

This will create a renewed credit contraction because of falling asset values in the affected banks’ balance sheets, which is a sure-fire formula for a double-dip recession, just like the one we had in the 1980s.

Unlike then, however, there will be no further room for interest rate cuts. As such, the second leg of the recession will not result in a “W” but will instead produce an “L” shaped recession–a persistently lower living standard.

We are on the threshold of a secular bear market that could last for decades.

Do they think people are idiots?

Yes, they do. That’s the excuse for bailing out all the homeowners. Who could have known that using a wonky loan in an overheated market was a risky investment?

Treasury believes that they can distinguish between new purchases and refinance. I say that’s bs. Say, my neighbor and i both have the same type of home at 6%. We can just sell each other our houses twice in a row and magic! all of a sudden our loan dropps to 4.5%!

Do they think people are idiots?

That would have the double benefits of rewarding responsible bubble-sitters and not blowing up the MBS holders.

“US mortgage applications post largest gain ever”, by Julie Haviv, Reuters, December 3, 2008.

U.S. mortgage applications surged by the largest amount on record last week as a new Federal Reserve program pushed interest rates down to their lowest level in more than 3 years, data from an industry group showed on Wednesday.
…
“This clearly was an early holiday gift from the Federal Reserve to mortgage holders and home shoppers,” said Mike Larson, a real estate and interest rate analyst at investment firm Weiss Research in Jupiter, Florida.

“But, the MBA’s data is only for submitted applications, not closed loans, so a good amount may get rejected because qualifying standards are tighter and many applicants will probably find they do not have the equity to refinance given the decline in home prices,” he said.

“Pimco’s Gross: 30-Year Mortgage Rate May Fall to 4.5%”, by Andrew Fisher, CNBC (includes video interview), December 3, 2008.

Bond guru Bill Gross told CNBC that the 30-year fixed-rate mortgage could fall as low as 4.5 percent as the economy stabilizes.

“The mortgage rate will come down another 50 to 100 basis points,” Pimco’s founder and chief investment officer said. “That’s basically what the government needs. They need a 4 1/2 percent to 5 percent 30-year rate in order to support home prices and, yes, to encourage refinancing and the process of reliquification within the economy.”

“Financial industry pushes for lower mortgage rates”, by Christopher S. Rugaber and Alan Zibel, Associated Press, December 3, 2008.

Financial industry lobbyists are urging the Treasury Department to take steps to lower mortgage rates and help stabilize the battered U.S. housing market.

Under one proposal, Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac, Scott Talbott, chief lobbyist at the Financial Services Roundtable, said Wednesday.

If enacted, such a plan would be an unprecedented opportunity for anyone with good credit and a solid income who could qualify for a mortgage at the lowest rates on records dating to the early 1960s, said Keith Gumbinger, senior vice president at financial publisher HSH Associates.

“You would have the mother of all re-fi booms,” said mortgage industry consultant Howard Glaser.

“U.S. Eyes Plan to Lift Home Sales: Treasury Considers Encouraging Banks to Offer Mortgages at Rates as Low as 4.5%”, by Deborah Solomon and Damian Paletta, Wall Street Journal, December 3, 2008.

The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full percentage point lower than prevailing rates for a standard 30-year fixed-rate mortgage.

Government officials are under pressure to address falling housing prices and mounting foreclosures, which underpin the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the strains on borrowers without appearing to bail out homeowners and lenders.

“A Rush Into Refinancing as Mortgage Rates Fall”, by Tara Siegel Bernard, New York Times, December 3, 2008.