The Fed & mortgage-backed securities question

3 Replies

Hello,

I just read an article today in the New York Times about the Federal Reserve and inflation (https://www.nytimes.com/2017/10/11/business/econom... ). In it, it mentions that the Fed started reducing its holdings of mortgage-backed securities in September by about $10 billion/month.

Does this mean Fannie Mae is now dumping $10 billion worth of notes (mortgages) into the secondary market to be bought and sold by banks, mutual funds, and note investors? If so, is this a larger amount then usual or fairly typical? And is this a buying opportunity individual note investors are seeing now or will be in the near future? 

Thank you for your thoughts.

Neil

@Neil Hohmann I didn't read that particular article but I usually read any articles related to the Fed and its holdings, especially MBS. The last time I read an article, my take was that the Fed is unwinding its QE program by not reinvesting its profits to buy additional MBS. It's allowing $20 billion per month (or $10 billion/month per your post) to mature without putting it back into anything. Given the trillions in mortgages in this country (at least $1 trillion in NPN the last time I looked), I don't think that $20 billion/month will have any effect, especially since the private equity world has come back and is buying all the asset backed securities they can get their hands on. Just my opinion.

Thank you, Andreas -- I appreciate the insight. 

Originally posted by @Neil Hohmann :

Hello,

I just read an article today in the New York Times about the Federal Reserve and inflation (https://www.nytimes.com/2017/10/11/business/econom... ). In it, it mentions that the Fed started reducing its holdings of mortgage-backed securities in September by about $10 billion/month.

Does this mean Fannie Mae is now dumping $10 billion worth of notes (mortgages) into the secondary market to be bought and sold by banks, mutual funds, and note investors? If so, is this a larger amount then usual or fairly typical? And is this a buying opportunity individual note investors are seeing now or will be in the near future? 

Thank you for your thoughts.

Neil

 My understanding of the way this works, with the layers of abstraction (such as MBS) removed...

Now: They hold a pair of $500k notes purchased X months/years ago. They both get paid off (refi, home sale, etc). They go buy another pair of $500k notes with the proceeds. Maybe they got some interest along the way, so they buy a pair of $505k notes.

When they taper back: They hold a pair of $500k notes purchased X months/years ago. They both get paid off (refi, home sale, etc). They go buy only one $500k note, not a pair of $505k notes.

Kind of like the "kind" way to downsize. Rather than firing everyone, you just stop hiring new people when folks move on. Or you only hire 1 for every 2 that quit. 

If they were to just dump all their paper on the secondary market, which I don't believe is in the pipeline, rates would spike overnight. 

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