The Presidential Mortgage Refi

Six days ago, at the end of a blog post (September 2, Blutarsky’s GPA), we indicated a concern regarding mortgage-backed securities, that during today’s speech a mortgage refinance proposal would be launched that would be a backdoor to QE3.

Almost in passing tonight, the President mentioned his intention to provide refinancing to qualified homeowners at 4% — in the name of creating jobs.

If this American Jobs Act were to pass Congress, the refinancing provision alone would allow $1 trillion dollars of mortgage-backed securities to roll off the books of the Federal Reserve.  Since the Federal Reserve has pledged to buy Treasury bonds with the proceeds of any mortgage roll-offs, this would be a $1 trillion quantitative easing without the public being aware of the stealth QE.

Sneaky, but well played.

From an investment perspective, the prepayment risk puts mortgage-backed security investments in peril.  If $1 trillion in stealth money creation passes, it’s jet fuel for risk assets and a huge negative for the U.S. dollar.

Keep an eye on MBS, the USD, and all things risk to assess the probability that this sneaky QE will actually go through.

I trust the markets (particularly the bond market) to tell the truth.

Far more than any political speech.