Initial Reaction to the Obama Mortgage Bailout Plan

He only announced it a few minutes ago in Mesa, Arizona, but let’s look at how the markets are reacting to Obama’s mortgage-relief plan.

The idea is to spend about $275 billion to give more money to Fannie Mae and Freddie Mac, and to facilitate refinancings of distressed mortgages.

It’s still too early to give you an actual analysis of the plan, but I did notice one very interesting thing. Obama’s warmup act was FDIC head Sheila Bair, who was been screaming about preventing foreclosures for a long time now. In her remarks, she said that voluntary mortgage relief hasn’t worked, and now it’s time to try something else. What that “something else” turns out to be, is of a course a matter of intense interest.

What did Mr. Market have to say about this? Prices for high-coupon mortgage-backed securities immediately tumbled. That makes sense if you assume that a lot of people who couldn’t refinance at lower rates before, will be able to now.

Yes, this raises interest rates. Yes, it makes the banking crisis worse by cutting the value of “toxic assets” still farther. Unintended consequences don’t always take so little time to appear.