The Streetsmart Bond Watch section on page fifty of the December 2003 issue of SmartMoney Magazine was illustrated by Brian Biggs’ characterization of a “See-Saw” with a House on one side and a United States Treasury Coupon on the other side. The most glaring aspect of that drawing for the article titled “The Bonds That Ate the Treasury Market” was that the two were not balanced on the See-Saw, visually giving us a picture of the United States Economy. You are either up in your portfolio or you are down, but never balanced.

The article took into account how Government Sponsored Organization financial institutions Fannie Mae and Freddie Mac’s dominance in the government housing bond market has off-set the balance sheet of the United States government’s primary debt instrument the United States Treasury Coupon. The article points out how just “ten years ago mortgage-backed securities were the 800-pound gorilla in the Treasury market”…. and “Today they’re the 1,800 pound gorilla.” They explained how “the market for mortgage bonds has grown, to $3.2 trillion today from $1.3 trillion 10 years ago…”

With all the wisdom that must be employed by these financial giants Fannie Mae and Freddie Mac plus their U.S. Department of Housing and Urban Development (HUD) government counter-part Ginnie Mae (Government National Mortgage Association), I must ask the rhetorical
question; “Why are housing bonds eating the Treasury Market?”

The answer is so simple that God must have hidden “it from the wise and prudent and revealed it unto a babe” like me.

I capitalized and underscored the answer which is in the explanation given in the article written by Llana Polyak and it goes as follows: “Here’s why: When interest rates fall, homeowners REFINANCE and pay-off their mortgages early. Managers of mortgage-backed portfolios then, in essence, reinvest that money in Treasuries. Their buying drives down Treasury yields, resulting in lower mortgage rates and more REFINANCINGS. And so it went until the yield on 10-year Treasuries fell to 3.11 percent, a 45 year low, in June.”… “As interest rates went up, mortgage-back securities were going down faster than the short Treasury positions were”…...“In order to play catch-up, people had to sell more Treasuries, and so it became a self-fulfilling prophecy.”

I am personally familiar with the advent of the mortgage revenue-backed bonds coming into the Private Activity Bond arena in the 1983 Tax Reform Act. I wrote the “White Paper” presented to then Senate Majority Leader Howard Baker of Tennessee expressing the need to allow housing to be treated as a facility, the same as schools and hospitals that are sponsored by religious organizations. That became law in 1983 and was amended by the word “all” in front of the word “housing” in the Tax Reform Act of 1985.

My job then, as a Shelby County, (Memphis) Tennessee Public Administrator, mandated that I reduce residential energy consumption utilizing the United States Department of Energy’s Weatherization Assistance for Low-Income Person Program as a primary funding vehicle. However, since the program targeted the poor which were mostly African-American in the Memphis area, I was restricted from using local property tax dollars as a means of additional funding. To formulate and to capitalize funding for housing, I put together all types of innovative inter governmental partnering programs to assist; including working with the local utility company Memphis Division of Light, Gas and Water, the largest federal electric power provider the Tennessee Valley Authority, the City of Memphis and the Shelby County Community Service Agency; as well as the Memphis-based Metropolitan Inter-Faith Association faith-based organization.

The reasoning presented to then Senate Majority Leader Howard Baker for the United States Congress to consider and to make housing a facility was that “all the patch work in the world would not make these substandard housing units energy efficient.” With all the rehabilitation that would be required, we could build these people brand new housing. The only issue then became how to make the housing affordable. Essential to all was that the money created for new housing facilities was for building new housing units.

Herein resides the problem today. The money to have been created from the “Housing Facility” provision of the Tax Reform Act of 1985 was to build new affordable housing units. The specific pointing and finger can be directed toward members of the Mortgage Bankers Association, whose members, before that money can be expended for the primary purpose it was intended by the Congress to finance new housing, devourers just about all the bond funds with the REFINANCINGS of existing housing.

This process by members of the Mortgage Bankers Association consumes the Mortgage-Bond funds so quickly that it causes the Treasury Market to fluctuate down so rapidly as to cause any right minded investor to consider de-investing of Treasury Bonds.

On the other hand, the Tax Reform Act of 1985 allows up to 24 months of legal arbitrage on mortgage bond funds, placed in your bank of choice, prior to having to start building the new affordable housing. This time line provided by the Congress allows plenty of time for the development, permitting and construction start-up process to begin. More than that, this time window allows those Mortgage-Bond funds to be utilized in the economy by your bank of choice to further bolster-up the United States Economy.

As said in William Shakespeare’s play Hamlet, Act One, Scene Two I believe: “The road to hell is paved with good intentions!!!” Instead of the Good Intention” I formulated for then Senate Majority Leader Howard Baker and for the United States Congress to bolster up the “LEADING ECONOMIC INDICATOR” housing starts by creating the capital formation to allow new housing production, the members of the Mortgage Bankers Association has driven it and the United States economy straight to hell in a hand basket!

Congress can change all of this by amending the loop-hole it has allowed the members of the Mortgage Bankers Association. It is simple, FINANCE HOUSING, 95% FUNDS PUTTING PEOPLE TO WORK!! REFINANCE HOUSING, members of the Mortgage Bankers Association MAKE 3% TO 5% REFINANCINGS FEES!! DAAAAAH!


John Eddie “J.J.” Jones, Senior Vice President

Pacific Rim Development Group, L.L.C.

Housing, Development and Construction Management Services

4301 South Pine Street, Suite 401
Tacoma Mall Office Building

Tacoma, Washington 98409

Email: pacrimd@...........