I Had a Very Nice Day at the Central Bank of Peru

The staff there are very smart and nice. I learned a number of interesting things: among them, the Central Bank invests in only sovereign and "agency" securities. I asked whether they would invest in a AAA corporate bond, and I was told no. Hence Fannie Mae and Freddie Mac, which do not have standalone AAA ratings, are preferred investments to, say, GE.

All of this makes it difficult for me to understand a quote from Daniel Mudd, CEO of Fannie Mae, in a Michelle Singletary story in the Washington Post recently. The relevant paragraphs are:

I

n an effort to help lower rates for borrowers needing jumbo loans, the recent economic stimulus bill included a provision to allow Fannie Mae and Freddie Mac to buy mortgages above the $417,000 limit.

The new jumbo loan limits won't be the same for all areas. The limits will vary but can't be more than $729,750.

Many jumbo loan holders are certainly anxious to know if rates will fall soon. However, Mudd wasn't sure that many homeowners with jumbo loans would actually see lower rates anytime in the near future.

"There will be some benefit," Mudd said. "How much? I don't know."

Mudd questioned whether investors would buy bundles of jumbo loans. Given the current mortgage crisis, investors might fear that these larger loans would be more risky, he said.

I am guessing that the reason that the Central Bank of Peru buys Fannie Mae notes is that the company has special status. I have gotten grief from many of my friends over the years because I have defended this status on the grounds that it is important to have the companies provide liquidity in times of mortgage market stress. If Mudd is arguing that his company is limited in its ability to restore liquidity to a rather important segment of the mortgage market (basically the entire East and West Coasts), one begins to wonder about the utility of his company's special status.