Fed could look to sell off MBS holdings

Central bank acquired $1.75T worth of mortgage-backed securities in wake of financial crisis

New York /
Feb.February 06, 2017 10:45 AM

Federal Reserve officials over the past few months have indicated they may be willing to reduce the $1.75 trillion worth of mortgage-backed securities it acquired as part of its experiment in quantitative easing amid the financial crisis.

The Fed is now the biggest buyer of U.S. government-backed mortgage debt, owning a third of the market, Bloomberg reported. But that’s long been a contentious issue, with some lawmakers arguing the investments go beyond what the central bank needs to achieve its mandate.

The Fed bought $387 billion worth of mortgage bonds last year alone in order to maintain its holdings.

Along with interest rates that have sat close to zero for years, the Fed’s demand for MBS has reduced the cost of mortgage debt relative to Treasuries, in turn encouraging banks to lend more to consumers. In a span of about two years that ended in 2014, the Fed increased its MBS holdings by roughly $1 trillion. Since then, 30-year bonds made up of Fannie Mae-backed mortgages have been about a percentage point higher than the average yield for five-and 10-year Treasuries, Bloomberg reported.

That’s a tighter spread than the market saw during the housing boom in 2005 and 2006.

The Fed last week kicked the can on raising interest rates again, but gave no indication when the next hike may come.

Unwinding quantitative easing could push the 30-year mortgage rate past 6 percent within three years, according to Moody’s Analytics. Rising mortgage rates are already putting a dent in demand in the housing market.

Dealers are anticipating that spreads will widen once the Fed starts to slow its MBS reinvestments. But putting MBS back into the hands of private investors could increase trading.

“Ending reinvestment will mean there are more bonds for the private sector to buy,” said Daniel Hyman, who is co-head of the agency-mortgage team at Pacific Investment Management Co. [Bloomberg]Rich Bockmann


Related Articles

arrow_forward_ios
With a cooling trade war, stocks perform well, including real estate. (Credit: iStock)
Real estate stocks push up this week as U.S.-China trade tensions ease
Real estate stocks push up this week as U.S.-China trade tensions ease
416 West 25th Street and Maverick Real Estate Partners principal David Aviram (Credit: Google Maps and LinkedIn)
Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case
Chelsea landlord claims “predatory” lender is charging a crippling interest rate as punishment after losing foreclosure case
Turnbridge Equities founder Andrew Joblon, KKR co-founder Henry Kravis and the distribution center (Getty, Turnbridge)
Turnbridge, Dune land $381M loan for Hunts Point site
Turnbridge, Dune land $381M loan for Hunts Point site
Vanbarton Group’s Gary M. Tischler and Richard Coles with Marble Collegiate Church at 1 West 29th Street (Getty)
Vanbarton Group, church sued by foreign investors in fallout from HFZ debacle
Vanbarton Group, church sued by foreign investors in fallout from HFZ debacle
Pittsburgh is the place to be for affordable mortgage payments. San Jose and San Francisco? Not so much. (iStock)
Ten most/least expensive cities to buy a median-priced home
Ten most/least expensive cities to buy a median-priced home
Real estate stocks climbed higher in August despite the end of a national eviction moratorium and uncertainty over how the delta variant would affect retail spending and a return to the office. (iStock)
Real estate stocks dodge obstacles, charge forward in August
Real estate stocks dodge obstacles, charge forward in August
A statistical analysis found that lenders were 80 percent more likely to reject Black applicants for mortgages in 2019. (iStock)
Secret bias in mortgage algorithms hurts borrowers of color
Secret bias in mortgage algorithms hurts borrowers of color
From left: JPMorganChase CEO Jamie Dimon, Goldman Sachs CEO David Solomon and Morgan Stanley CEO James Gorman (Getty)
Demand for private-label mortgages on the rise
Demand for private-label mortgages on the rise
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...