Do New Accounting Rules Force Banks to Use New Playbook?

The Housing Wire reports:

The crisis has also underlined the importance of those hungry big GSE portfolios. In the old days, Fannie and Freddie maintained a ceiling on MBS yields (translates to a ceiling on mortgage interest rates) through opportunistic investment in their own securities. Their presence made the market stable for the other participants, like U.S. commercial banks and foreign central banks looking for a place to put their bulging U.S. dollar reserves.

When mortgage spreads were in virtual free fall last autumn, the Fed stepped in with its MBS purchase program (allowing spreads to tighten to historically narrow levels). But the Fed is scheduled to stop the purchases at the end of this year. The GSEs aren’t going to step back in either – starting in 2010 they are required by law to reduce their portfolios 10% per annum. The mortgage market has begun to worry about this possibility – and the possibility that MBS prices could plummet five, ten points – who knows, it’s never happened like this ever before – on the Fed’s departure.

This article might be a little technical for some, but well worth your time. If the Fannie and Freddie get chopped down, that would be a good thing.