A US government plan to hold interest rate payments steady for some subprime borrowers could bring the mortgage bond market back to life and may be the first step in containing the housing crisis, investors said on Friday.
Details of the government plan, expected to be announced as early as next week, are still being worked out; even if the proposals are enacted, it is still not clear it will rescue the mortgage market.
Based on early reports, investors are hopeful the plan will breathe new life into the faltering market for bonds backed by home loans whose shaky health has helped create one of the worst housing markets since the Great Depression.
"Now the view is that the government is going to help contain the subprime problems and that will help other mortgage products as well," said Alec Crawford, head of mortgage bond strategy at RBS Greenwich Capital in Greenwich, Connecticut.
Despite their triple-A ratings, even "agency" mortgage-backed securities issued by Fannie Mae and Freddie Mac have weakened relative to Treasuries this year as the subprime mortgage crisis made investors jittery about all mortgage bonds. Subprime mortgage bonds, backed by home loans to borrowers with poor credit histories, rebounded on Friday after news of the rescue plan. Wall Street dealers are now testing the market for buyers of asset-backed securities, and bid lists circulated to investors included one $100 million list of subprime bonds and another $300 million in commercial mortgage-backed securities.
Agency mortgage bonds - more than half the total of all mortgage bonds - also rallied on the news. The US Treasury Department is close to announcing a plan it is brokering with mortgage industry leaders to hold interest payments steady for many subprime borrowers who are facing foreclosure.
Wall Street dealers are now testing the market for buyers of asset-backed securities, including subprime mortgage bonds, on expectations a federally supported plan to curb foreclosures will reassure investors in the debt, money managers said.