What Happens if the Federal Reserve Sells Mortgage Backed Securities?
ฝัง
- เผยแพร่เมื่อ 1 ต.ค. 2024
- A look into what happens if the federal reserve starts selling the MBS on their balance sheet. The federal reserve has never sold mortgage backed securities so it's uncertain how that would affect the housing market.
Sources:
fred.stlouisfe...
www.newyorkfed...
Licensed Realtor at Geri Reilly Real Estate
Contact info:
Email: liam@buyvtrealestate.com
Cell: 603-340-1776
Office: 802-862-6677 ext. 108
See what my past clients said about working with me! www.zillow.com...
In hindsight, the MBS buyouts of 20-22 were unnecessary and had disasterous consequences
Yeah we are paying the price for that stimulus today
This dated well, it is happening right now in the official released document from today's FED meeting. Thanks!
Interesting, I didn't see that press release. Do you know where I can find it?
Could you perhaps make a youtube video where you assess whether now (January 2024), is likely to be a good time to buy Mortgage Backed Securities? Further, could you comment on whether you would buy individual issues (e.g., on Schwab), or MBS ETF (e.g., mbb). I assume variables would be interest rate trends (presumably lower), MBS rolling off the Fed Balance sheet, etc. Treasury and CD yields are lower than they were a few months ago. Would MBS be a suitable alternative to buying longer term Treasuries or CDs (e.g., 5+ year CDs).
I'm not qualified to give that sort of advice. On the surface, it seems like now is a solid time to buy MBS while the spread between the 10 year and mortgage rate remains elevated.
I find it surprising that the FED has continued to purchase MBS since 2008-2021 and am curious if anyone has any reasoning to suggest why the FED would continue to do so? I am under the assumption that FED began buying these MBS to effectively prop up the housing market (not letting prices continue to fall). Might this also suggest that the FED has directly or indirectly contributed to rise in home prices? If so, wouldn't that also suggest that the FED deciding to sell/roll-off MBS might also lead to home prices decreasing? I have to assume the FED taking the "risk" out of MBS has to have had some effect on the intrinsic value on some of these MBS. Any clarification is appreciated!
I think you're spot on. The FED bought MBS's to stop the bleeding back in 2008. Why they didn't stop is beyond me. Maybe they feared home prices collapsing if they pulled out too soon. However, they've effectively pulled out of the MBS market today, and home prices aren't dropping nationally. That's because they kept mortgage rates artificially low for 15 years, and all the home owners who took advantage of those mortgages are locked in to a 30 year rate at below 5% and aren't incentivized to move. They are the blame for the current housing unaffordability we're experiencing today.
In my opinion, the best solution is to keep the FED out of the MBS market and let free market rates dictate housing. It will take 15-20 years, but eventually everything will balance out as it should. What's more likely to happen is the FED hops back into the MBS market during a recession and further handcuffs themselves to this artificially propped up system. In the long run it's worse for the US dollar than anything.
I hope this helps clarify things.
Thank you for the website you listed. I think you got the theory almost right but needs to be tweaked a little.
The fed is trying to unload the mortgages they have but not many investors want to buy them because the ROI isn’t good for them at low mortgage interest rates. So if the Feds can’t move these mortgages off their balance sheets they are going to have to increase interest rates with the intent that mortgage interest rates will increase as well to entice more investors to buy mortgages from them.
The issue is that out of all of the US banks, the fed currently owns the most $$$ of mortgages. The next highest owners are these regional banks, then some of your bigger names banks. We see that the regional banks are going under so they can’t buy mortgages from the feds, and the other bigger name banks have been avoiding buying mortgages for a long time (hence why the feds lowered mortgage rates before to allow for banks to take on the fabrication of new mortgage loans so more people can buy a home) and they aren’t exactly jumping at the opportunity to buy loans back from the federal government at this time.
Anyways, if the fed cannot unload these mortgages do expect for mortgage loans interest rates to stay high (in the 7s or more) for a long time till they are able to get enough buyers.
So I thank you for showing that link to the page you used because now I’m going to see how many/much mortgages were sold since the rates shut up to 7-8%.
Sorry, I'm just seeing this now. Thank you for sharing your perspective.
Are you saying that if the Fed can't sell the MBS's on their balance sheet, they will need to increase the market mortgage rate, which will in turn make their MBS's more attractive? I believe the majority of MBS on the Fed's balance sheet are locked in so the current interest rate moves shouldn't affect the return they're getting on their MBS.
The Fed can always drop the price of their MBS in order to make the return more attractive than anything on the market. For example, if the Fed owns an mortgage they bought at $100,000 at 3% interest rate, that means the yield is $3,000. If they want to unload that asset they can go to the market and offer to sell it for $30,000, and then whoever buys it will be getting a 10% return.
My argument is that if the people currently purchasing MBS were given the choice between a 7% return from a new note or a 10% return from a note sold by the Fed, it's really a no brainer. This would push mortgage rates up as new borrowers need to compete with the returns the Fed is offering on the secondary market.
I think we're a little past this point now though. The housing market has stabilized, and based on the Fed's most recent press conference I don't think actively selling their MBS's is something we're likely to see. They are still letting their debt mature and shrinking their balance sheet, and I think long term is great for the housing market even though there's short term pain.
Really appreciate your perspective. Thank you for your comment.
Why isn’t the ROI good for investors just because the yield is below current yields? It depends at what price the buyers bid that determines their yield to maturity or yield to call.
How does higher yields make the feds mbs portfolio more attractive to buyers? That doesn’t make any sense.
Why doesn’t the Federal Reserve care about their return on investment from the securities? Don’t they want profit also?
Because the goal of the Federal Reserve is to maintain financial and economic stability, not make a profit. The Fed as an institution is in existence regardless of how much profit they make. Their whole goal, from what I understand, is to make sure the economy keeps running, the dollar maintains value and to minimize the economic pain felt during recessions. That's why the Fed can buy mortgages at a 3% interest rate. They aren't concerned about the return they're getting off of the mortgage. They're concerned about keeping the economy moving.
So, what I was theorizing in this video is that the Fed doesn't need to profit from the sale of their MBS's if they decide to sell. Their goal by selling will be to slow the housing market down by offering a more attractive product to MBS investors that theoretically should cause mortgage rates to increase. The only way they can sell those products will be taking an upfront loss. They'll need to sell at a cheaper price because MBS investors can get a 6% return on new prime rated mortgages being issued compared to a 2.75%-5% return on many of the mortgages the Fed owns.
It's tough to say with 100% certainty though. The Fed has never sold the MBS on their balance sheet before so we don't really know what it will look like when they do.
Thank you for your comment. I hope this helps clarify things.
Short-term wins by the FED, long-term too much liability... expect a lot of smoke alarms to go off. Weather the storm the best you can.
Great video! Thanks for this
Glad you liked it!
Debt cancellation.
Certainly possible
The FED will most definitely start selling MBS. He said it himself last week, their main goal is to hit 2% inflation by any means necessary, and the housing market has yet to bend the knee. 2013 and likely part of 2014 will be a very rocky road for real estate.
Yeah it will be. I think raising the Fed funds rate is actually increasing housing inflation. Rents and owners equivalent rents are likely to keep rising if less people can afford to buy and are pushed into renting.
2023-24 will see housing transactions drop off a cliff.
Thank you for your comment.
@vermonteconomicrealtor plus he has already said interest rates are going to be high and stay high for a good long while. Affordability will not magically change for the average home buyer.
@@SportyGeek12 definitely not. It’s a new market for home buyers
@@vermonteconomicrealtorraising interest rates will make input costs and borrowing costs for home builders to increase further constricting supply. They should be trying to aggressively offload the mbs to undo the artificial increase in housing prices before tinkering with the FF rate. I understand since they own 25% of the mbs market they may not be able to sell due to the lack of reasonable bids.
Can you clarify-if the Central Bank sells a bond, shouldn’t they receive payment in return, therefor how is the balance sheet actually being reduced? Is it that the Fed takes this at a loss, thus reducing it the difference?
Great lecture!
The fed owns 2.6 trillion USD in mbs. If they sell 600 billion in face value then they reduced their balance sheet to 2 trillion USD.
Great questions. My understanding is if the Federal Reserve sells a bond and makes a profit on that bond they will hand the profit over to the US treasury. That's how it worked over the past 15 years or so when the Federal Reserve's balance sheet was profitable.
My understanding of how the Federal Reserve operates is that they don't keep excess cash on hand to invest. When they decide to buy bonds they print money to do so. So, the Fed's balance sheet roughly consists of the bonds they hold and the cash banks deposit into their facilities. "Losses" the fed takes enter into a future repayment file with the US Treasury that any future profit will need to be repaid to. The Federal reserve has been losing money for over a year now and I bet that repayment amount is approaching a trillion dollars if it's not there already.
The Federal Reserve reduces their balance sheet by lowering the number of bonds they hold. So, they can reduce the size of their balance sheet either by letting their current bond holdings mature without purchasing new bonds or selling their bonds on the secondary market. If they choose to sell their bonds on the secondary market, this could flood the bond markets with excess supply causing yields to rise.
Does that answer your question?
So how many 6 month puts of MBB should I buy lol
Well, we'll see if they end up following through. Right now they can only sell a maximum of $150m in MBS at a time. That could change in the upcoming months
What if the fed just let the MBS mature?
Well, they are doing that with a lot of the MBS's and Treasuries on their balance sheet. I think that's what they mean when they say they are letting assets "roll off their balance sheet". What I see happening as a result is that they are losing money. They have less assets to pay the promised Fed Funds interest rate. They lost over $128b last month which is insane.
I briefly go over that in this video: th-cam.com/video/n_wQnEJtvnM/w-d-xo.html
Thank you for your comment.
The prepayments are not occurring because the embedded prepayment calls are so far out of the money and existing mortgages are not retiring from the sale of a house due to the low amount of housing sales. So the roll off is very small. I haven’t seen the numbers but I suspect they are well below the caps set.