Subject: RE: another question, if you don't mind
From: "Arlene Busch" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Michael Muldoon" <[email-masked]>
Date: Fri, 13 Aug 2010 11:05:50 -0400

Is it ok to forward the message below to jack or should I try to contact him
on the phone?

Arlene Busch

202-333-1880

[email-masked]

*From:* Hunter Biden [mailto:[email-masked]]
*Sent:* Friday, August 13, 2010 10:50 AM
*To:* [email-masked]; Eric Schwerin; Michael Muldoon
*Subject:* Fwd: another question, if you don't mind

A- will you ask Jack about this and get back to Nick. Thanks.

R. Hunter Biden

202-333-1880

Begin forwarded message:

 *From:* Nick Rohatyn <[email-masked]>
*Date:* August 13, 2010 4:41:43 PM GMT+02:00
*To:* "Hunter Biden" <[email-masked]>
*Subject:* *another question, if you don't mind*

 Hunter,

We are hearing noise around Fannie and Freddie, along the lines set out
below. Have you heard anything along these lines? Just checking for the
possibility of any big surprises….

FOMC, Fannie, Freddie, mortgages:

·         *Fannie/Freddie + housing - some more talk today about an "Aug
Surprise" - *recall this talk was first around last week (see the Reuters
article below that we sent around last Thurs Aug 5).  The market speculation
has a few different flavors but involves two components: 1) FNM/FRE/FHA
would automatically refi all the agency/FHA mortgages down to the prevailing
market rates (so people who are current w/their mortgages but can't refi for
some reason would be able to take advantage of the current low rates); 2)
FNM/FRE/FHA would eliminate "negative equity" for those homeowners who have
mortgages worth more than their house.  *Recall that a bunch of press
sources (inc. CNBC, DJ, etc) have downplayed the odds of anything this major
happening (its not even clear if such a move would be legal)*.  Keep in mind
that there is a big housing conf coming up next week (Aug 17) and some think
that the White House/Treasury could launch a refi initiative around this
event.  The White House made a very minor announcement on housing today (the
Treasury will devote an incremental ~$3B towards providing housing relief
for unemployed people) but this is a far cry from what is being talked about
around Fannie/Freddie.

·         *Is the Fed move from yesterday foreshadowing a move by
Fannie/Freddie?*  Given that the reinvestment decision wasn’t well
telegraphed by Fed officials, there is some talk that it was done in
anticipation of a massive refinance wave coming down the pipe as a result of
a Fannie/Freddie “August Surprise”.  A large uptick in refinancings would
theoretically shrink the Fed’s balance sheet beyond what has been occurring
currently from normal maturities – by making the decision to reinvest
maturing MBS, Bernanke will offset the contractive effects of such a
shrinkage.

·         *JPMorgan wrote about this Fannie/Freddie spec a couple wks back*:
https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-450965-0

·         *JPMorgan today announced the upcoming release of the new
J.P.Morgan agency prepayment model.* While the prepayment environment is
more uncertain than ever (in light of potential changes in government
policy), we are recalibrating our model to be closer to the recent
prepayment experience. Specifically, we are flattening the overall refi
response (linking it to trailing HPA), shifting prepayments from voluntary
to involuntary as we capture a more efficient GSE buyout regime, and
changing the mortgage rate propagation to reflect the widening
primary/secondary spreads in a rally. The net results is wider OAS and
longer duration across the board, with the biggest impact on higher dollar
priced bonds (Matthew Jozoff)

·         *The banks are pretty weak today for a few reasons*, but in part
b/c of the worry that this refi program would harm the value of bank MBS
holdings (the narrowing yield curve is also hurting bank sentiment a lot).
Recall back to a Bloomberg article on Aug 3 that talked about how banks
added to their MBS holdings at the fastest rate in 18 months (large US
commercial banks added $51.4B worth of agency MBS in the two weeks ended Jul
21)

Many thanks,

N

Nicolas S. Rohatyn

The Rohatyn Group

280 Park Avenue, 27th Floor West

New York, NY 10017

212.984.2901

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