(Bloomberg Businessweek) — Why, again, is the Federal Reserve adding $40 billion a month to its holdings of mortgage-backed securities when the mortgage market doesn’t seem to need any federal assistance?
After all, the national average for a 30-year fixed-rate mortgage loan is 3.02%, according to the latest survey by mortgage buyer Freddie Mac Corp. That’s up only a bit from the less than 2.7% in January and February, the lowest in records going back to 1971. Cheap loans are fueling a historic rise in home prices that’s making homeowners rich on paper but crushing would-be first-time buyers: The S&P CoreLogic Case-Shiller index of U.S. property values climbed 14.6% in April from a year ago, the biggest gain in data going back to 1988.
When you get a loan from a bank or a nonbank lender, there’s a good chance it will be packaged into a mortgage-backed security and sold to investors, and there’s a good chance the ultimate holder will be the Federal Reserve. Which means the Fed could be financing your mortgage. In the week ended June 23, the Federal Reserve owned $2.35 trillion in MBS, according to the Fed’s H.4.1 statistical release. The Securities Industry and Financial Markets Association (Sifma) reports there were $8.44 trillion in the securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae at the end of 2020, meaning the Fed owns more than a quarter of the MBS market.
The Fed bought 47% of the net issuance of MBS in the fourth quarter, if you go by its $120 billion quarterly increase in holdings and Sifma figures showing that the total of outstanding MBS grew by $257 billion. True, not all mortgages are packaged into agency securities the Fed buys. The government-sponsored enterprises’ share of first-lien mortgage originations in the third quarter of 2020 was 61.9%. That share fluctuates, as does total issuance. Back of the napkin, though, multiplying 47% by 62% gives you about 30% of the overall U.S. mortgage market being financed by the Federal Reserve.
On June 29, Federal Reserve Governor Christopher Waller said it might be time to start cutting back on the Fed’s support for housing. “I think it’s an easy sell to the public,” he told Bloomberg Television. “The housing market is on fire. We should think carefully about doing MBS purchases, and if we were to taper those first that wouldn’t necessarily be a big issue.”
Fed Chair Jerome Powell is trying to keep the Federal Open Market Committee united behind continuing to buy MBS and Treasuries as a way to hold down interest rates and promote economic growth. The recovery, he says, is incomplete. The U.S. still had 7 million fewer people employed this May than in February 2020, before the pandemic struck. But he hasn’t done a wonderful job of articulating why buying MBS is the right medicine for the economy. It is not, he says—not—a way to support the housing market. Read this somewhat confusing excerpt from the Fed’s official transcript[MOVED LINK TO ‘TRANSCRIPT’] of the FOMC press conference in April, where Powell responds to a question from Greg Robb of MarketWatch:
CHAIR POWELL: Yes. I, I mean, we’re—we started buying MBS because the mortgage-backed security market was, was really experiencing severe dysfunction, and we’ve sort of, sort of articulated, you know, what our exit path is from that. It’s not meant to provide direct assistance to, to the housing market. That was never the intent. It was really just to keep that as—it’s a very close relation to the Treasury market and a very important market on its own. And so that’s, that’s why we, we bought as we did during the Global Financial Crisis. We bought MBS, too. Again, not, not an intention to send help to the housing market, which was, which was really not, not a problem this time at all. So—and, you know, it’s, it’s a situation where we will, we will taper asset purchases when the time comes to do that, and those, those purchases will come to zero over time. And that time is not yet.
A better argument might have been, “Look, we’re a big player, so we try to spread our money around. Yields on Treasuries and MBS are linked, because investors choose between them. Buying MBS helps hold down interest rates on Treasuries and vice versa. All kinds of other interest rates consumers and businesses pay are pushed down when we buy Treasuries and MBS.”
Or something like that. A market intervention as big and enduring as the Fed’s in housing finance requires a strong and understandable justification.