Bargain hunters: MBS today, housing tomorrow

The headline on this AP story looks like welcome news: "Pension plans take chance on mortgages."

Until this week, a flood of mortgage-backed securities (MBS) on the market had been pushing mortgage rates up. The Fed's new programs to accept MBS as collateral for loans are helping firm the market, and Fannie Mae and Freddie Mac now have additional leeway to buy up $200 billion in extra MBS (see previous post). But in the long run, what mortgage markets need is a big influx of investment capital.

The director of South Carolina's pension fund tells AP that MBS prices have "no bearing to the fair market value of these assets anymore" and says the fund has outside managers looking for bargains. A spokesman for Pennsylvania's state employees retirement fund says "Some of the securities that have dropped in value were really very solid securities" that the fund is looking into buying.

The story notes that buying "is very tentative, and may not presage a broader turnaround in these securities." South Carolina has only put $8 million of the $100 million it's thinking about investing in MBS into play -- both figures are insignificant in the grand scheme of things.

But it's another indication that the MBS market may be hitting bottom -- and that's a milestone we probably have to pass before housing markets can do the same.

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