Federal Reserve IS the mortgage market

The Federal Reserve announced this week that it is going to wind down its program to purchase $1.5 Trillion worth of mortgage backed securities.

“I don’t think there are enough private buyers to replace the central bank,” said Sung Won Sohn, professor of economics at California State University. “If there is even an inkling that the Fed is going to start selling by 2010, we would see mortgage rates go up right away.”

People are right to be concerned about the Fed trying to sell any of that massive pile of overpriced securities. But that isn't the only reason to doubt the Fed's ability to wind down this program.
Chris Martenson did some simple math and found something interesting.

So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.
Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:
That is, a total of ~$686 billion in new mortgages were issued in 2009 (through August).
Now let's look at how many Mortgage Backed Securities (MBS) and agency debt obligations were accumulated by the Federal Reserve on its balance sheet over the same period of 2009:
It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.
In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.

This is a HUGE problem. Even if Martenson's numbers are off by several percent the fact remains that the Fed is the only serious buyer of mortgage-backed securities out there. If it tried to unload even a small percentage of them it would swamp the market. It couldn't unload them even if it offered them at a discount.
What's more, if the Fed tried to sell the MBS it would drive mortgage rates up so far that the housing market would completely freeze up.
The Fed has purchased many of these MBS at near face-value. With foreclosures and delinquencies rising, it appears that the Fed is going to be taking massive losses to its portfolio.

Image Hosted by ImageShack.us

Subject Meta: 

Forum Categories: 

too tired to check the math but

MBS aren't the same as mortgages right? It's not a 1:1 ratio, involves CDOs, etc. derivatives.

I'm really under the gun on a project right now so I hope all other EPer's post to "feed the pig" and keep our readers happy with the latest outrage du jour facts.

Credit derivatives and quantum physics

I was looking at the data last month and came up with a 90% figure, which I also ran across at several biz sites. (So either 90% -- 100%, the range itself is startling.)

MBSes, Mortgage Backed Securities, could be tranched any number of ways, so when they state they purchased so many billions, that is really open to interpretation (the problem with having securitized financial instruments, numbering in over 3,000 categories now, is that I'm unaware of anyone is truly expert in the matter, although there is no shortage of charletans claiming to be --- especially at the Fox-owned WSJ and the American Enterprise Institute, always suspect).

They may have issued x number of securities per mortgage, which is where that multiple layers of securitization comes into play, plus those who purchased these securities or CDOs could then combine them with others and issue "securitized notes" based upon their supposed value -- thus simulating the same aspects as Credit Default Swaps to a degree. Also, when they spliced and diced the mortgages into clusters, they may have issued multiple CDOs per batch (or rated tranch), and then issued synthetic CDOs on top of those. A neverending trail of credit derivatives.

What we are seeing, of course, is quantum finance (not quantitative finance), where there is a "particle-wave duality" such as one finds in the realm of quantum physics, where those MBSes may be worth nothing on one day, but worth billions, according to Bernanke and Geithner, on another!

An example of a simplified category of securitized instruments from a single ABN AMRO (now rolled into the Bank of Scotland) prospectus:

Credit Linked Notes, Leveraged Credit Linked Notes, Reverse Exposure Credit Linked Notes, Leveraged Basket Credit Linked Notes, First to Default Basket Credit Linked Notes, Tranched Basket Credit Linked Notes, Leveraged Tranched Basket Credit Linked Notes, ad infinitum....

a lot of fun in your comment, thanks

where is davet, he'd love it!

Yeah, it's not clear if they mean the actual mortgages or underlying derivatives from the article.

This is a side comment but I'm in a different area of my home on a Fedora box and Good god does the site read and look so much better in FF with Fedora (linux).



The taxpayers are also expected to live up to their pledge to back the Federal Deposit Insurance Corp. (FDIC), which will now be responsible for bailing out banks whose FHA-MBS have become a bigger portion of their assets.

Paul Volcker interview as covered by Bloomberg

This is it all:

“This recovery will be slower,” he said. “We can’t just pump up consumption and pump up housing again.”

Unfortunately, that is exactly what we are doing.

FYI - this was an interview with Charlie Rose on PBS.

RebelCapitalist.com - Financial Information for the Rest of Us.

Almost correct

It's what we are trying to do. Trying to create a wealth effect in the face of massive losses.
Frank T.

Frank T.