Fed Actions Have Immediate Effect

The move by the Federal Reserve Tuesday to enter the market and buy both the debt of the government sponsored entities and mortgage-backed paper had an immediate and dramatic effect.

The Fed will buy $100 billion of the direct obligations of the GSEs starting as soon as next week. It will buy up to $500 billion of MBS's before year end. This $500 billion is 10 times the amount it has spent so far, and the $100 billion in direct GSE purchases would be about 5% of the total outstanding for all three GSE's involved -- Fannie Mae (FNM - commentary - Cramer's Take), Freddie Mac (FRE - commentary - Cramer's Take) and the Federal Home Loan Board. The reason for the quasi-takeover of these agencies by the government was to ultimately lower mortgage interest rates. Yet rates have been higher since the "takeover."

Also, the explicit guarantee of new bank debt left investors wondering why they should buy agency paper that had only an "implied" guarantee.

Tony Crescenzi of RealMoney.com reports that the yield on Fannie Mae 30-year paper improved by more than 50 basis points, a huge move in the bond market. Fannie's 30-year bond has always been closely correlated to the interest rate on a 30-year mortgage. Theoretically, the rate on a 30-year mortgage should improve by the same 50 basis points plus. If that happened, the rate on a 30-year mortgage would fall to around 5.5% to 5.6%, plus or minus a little bit. The average for this year has been a bit over 6%.

If that were to occur it would be welcome news to the housing market as there was another dismal report from the Case-Shiller Home Price Index. The index fell 17.4% in September versus a year ago and all 20 cities in the report showed a loss. There is nothing good in this report.

---

Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.