Ben's Big Bet

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Forget AIG. Focus on B-B-B or Bernanke's Big Bet.

The news that matters this week is the remarkable move by the Federal Reserve to purchase an additional $750 billion in mortgage-backed securities and another $300 billion of long-term U.S. Treasury bills.

It is a daring move that signals just how committed Federal Reserve Chairman Ben Bernanke is to kicking the housing market in the pants.

The Fed's commitment to buy massive amounts of mortgage-backed securities (a total of $1.25 trillion to date) is a huge step towards getting credit flowing in the real estate sector by creating a market for mortgage debt.

Make no mistake, the Fed's action will result in more mortgage and commercial real estate loans. Today, tomorrow and possibly for years to come.

The $300 billion purchase of long term U.S. debt – U.S. Treasury Bills -- is having an immediate impact on mortgage rates because most lenders peg their interest rates on the 10-year Treasury note. A little supply and demand primer here: As more buyers bid for Treasury notes, the note's interest rate (cost to the government) drops. The presence of the Fed in the Treasury Markets creates a sellers market and hence lower interest rates.

Mortgage brokers are already telling us they are seeing mortgage rates lower than ever before. Laura Sosa-Rocha of Truth and Lending in Atlanta says she is seeing 30-year fixed rates at 4.75 percent. She had two dozen e-mails waiting for her this morning from clients desperate to lock in rates.

Gary Akright at Dominion Mortgage Corporation in Dallas is being quoted 30-year fixed rates at 4.5 percent and 15-year fixed rates at 4.375 percent. Akright is careful to point out these rates are only available for people with excellent credit (760 FICO score or higher) and with 20 percent down payments. He says he would not be shocked to see these rates go even lower. He believes this is also an unprecedented opportunity for refinancing mortgages. Ninety percent of his business lately has been refi's.

There's still a number of obstacles the Fed moves does not address. For example New York Mortgage Broker Richard Biondi of RJB Financial warns loans financed by Fannie Mae and Freddie Mac are carrying high fees. These "Adverse Market" fees can add $1,000 for every $100,000 in loans for a buyer with a FICO score of 620 and a 20 percent down payment. That's scared away some buyers.

"In some cases, they don't want to do the loan because they don't want to spend the money," says Biondi.

It's important to remember "The Great Recession" started with the housing sector collapsing. So far it's cost 4.4 million jobs and has left 12.5 million searching for work.

Nearly every economist we have spoken to over two years of reporting agrees this will not end unless housing can get off the deck. The Fed's gamble is designed to do just that.

History students 50 years from now will probably have to memorize the details of Ben Bernanke's big bet -- not about AIG's big bonuses.

Guy Campanile is business producer for the CBS Evening News with Katie Couric
  • Guy Campanile

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