The Fed now owns nearly 1/3 of all U.S. mortgages

https://www.thestreet.com/mishtalk/economics/the-fed-now-owns-nearly-one-third-of-all-us-mortgages

by elsewhen • 6 years ago

262 331 6 years ago

nic_wilson• 6 years ago

In case anyone else was wondering how this might compare to "normal":

Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing.
Just before this latest round, principal payments from its mortgage bond holdings had whittled that down to 21%, but it has now increased back to 30%.

olliej3• 6 years ago

Does the fed get the interest income from those mortgages? Because if it’s not getting 100% of that interest it’s simply bailing out speculative loans by banks.

What are the rules for the fed taking on mortgages etc? I would want a max price of 80% of the value of the mortgage alongside the all proceeds portion so that banks can’t just make bad loans and then onsell them to tax payers

JackFr4• 6 years ago

Taxpayers don’t need to bail out the Fed. The Fed literally creates money ex nihilo.

baconandeggs5• 6 years ago

The Fed creates the money, but the taxpayers give it value.

clairity• 6 years ago

"The Fed literally creates money ex nihilo."

that's too simplistic. the fed has wide latitude (probably too wide), but it should correlate with the (fuzzy, hard to accurately measure/model) productive capacity/velocity of the (globalized) economy, not just an unlimited well only constrained by inflation's devaluatory noose.

moreover, considering our technological progress and trajectory, i'd love to see us revisit the idea that money can only be injected into institutions (via central banks), which was a limitation of scope imposed by the practicalities of pre-21st century life. it's also a gatekeeper's gold mine on a no longer necessary choke point. we should move towards injecting money straight into the hands that create value, not into those of middlemen like bankers.

olliej3• 6 years ago

... um, taxpayers are the fed.

So any time the fed takes on a debt made by a business at anything other than a discount the fed is bailing out bad business decisions, and that means the taxpayer is paying for it.

If the fed just “prints money” to cover those debts the real value of the USD collapses, and that hurts individual taxpayers more than the big businesses being bailed out.

mrep5• 6 years ago

From the Federal Reserves press release in 2015: https://www.federalreserve.gov/newsevents/pressreleases/othe...

The Federal Reserve Board on Monday announced preliminary results indicating that the Reserve Banks provided for payments of approximately $97.7 billion of their estimated 2015 net income to the U.S. Treasury. In addition, the Federal Reserve transferred to the Treasury $19.3 billion from Reserve Bank capital surplus on December 28, 2015, which was the amount necessary to reduce aggregate Reserve Bank surplus to the $10 billion surplus limitation in the Fixing America's Surface Transportation Act (FAST Act). The FAST Act, which was enacted on December 4, 2015, requires that aggregate Federal Reserve Bank capital surplus not exceed $10 billion. The 2015 audited Reserve Bank financial statements are expected to be published in March and may include adjustments to these preliminary unaudited results.

The Federal Reserve Banks' 2015 estimated net income of $100.2 billion was derived primarily from $113.6 billion in interest income on securities acquired through open market operations (U.S. Treasury securities, federal agency and government-sponsored enterprise (GSE) mortgage-backed securities (MBS), and GSE debt securities).

alex_young2• 6 years ago

That is interesting, but can someone explain why this is a bad thing?

isoskeles• 6 years ago

I think it would generally inflate housing prices. The Fed is a large buyer that can 'print' its own money to purchase these assets, so there isn't much incentive for it to examine the debt that its buying. It buys these mortgage bonds from banks that may also be incentivized not to scrutinize the people they're loaning money to (beyond whatever is required by law in underwriting a mortgage), because they know the Fed will purchase their debt without much question.

Of course, there might be other reasons and counterarguments, this is just my interpretation.

vermilingua• 6 years ago

IANAE(conomist), but my naive interpretation is this: let’s say the pandemic causes 25% of mortgage holders to become delinquent, a number I don’t think is unreasonable. If the Fed owns a third of all mortgages (and their ownership is a normal distribution of all mortgages, I have no idea if this is true), that’s 25% of $2T that is suddenly at risk.

If the total Fed balance sheet is $7T, that’s 7% of their total assets that could disappear. That seems like a lot to me.

renewiltord• 6 years ago

Yeah but the Fed can just make 7.5% more money and we're back at even and it won't even be bad because they're trying to increase inflation not decrease it.

boulos2• 6 years ago

Actually, your 25% delinquency rate seems unreasonable. During the financial crisis, the subprime delinquency rate peaked at 26% [1] but the overall (whole US market) rate was just over 9%.

Delinquency is also mostly just about being a leading predictor of foreclosure or some sort of renegotiated payment structure. The same stat suggests that foreclosures overall peaked at just over 2% (but up to 15% subprime) [1 again, but also 2 which is more clear on 2.23%].

So I’d assume something closer to 2-5% foreclosure, depending on your estimates of benefits policy. Even in foreclosure, there’s still recovery (financially).

In fact, Goldman Sachs might even make a profit re-selling the mortgages it bought off of Fannie / Freddie as part of its $1.8B court-mandated “consumer relief” program [3]. It’s unlikely the Fed would be as “good” at this as Goldman, but a likely unwinding strategy would be to sell them to similar investor groups. Either way, not going to $0 :).

[1] https://www.statista.com/statistics/205959/us-mortage-delinq...

[2] https://www.google.com/amp/s/www.statista.com/chart/amp/1546...

[3] https://www.google.com/amp/s/www.bloomberg.com/amp/opinion/a...

remote_phone4• 6 years ago

I just refinanced my 30-year fixed mortgage for 2.5%. The rate is utterly ridiculous now. If we get even a modicum of inflation over the next few years, I will be paying negative real interest rates.

the-dude3• 6 years ago

I was paying 0.6% for the last years ( Euribor mortage ). Some people in North West Europe actually had negative rates already.

refurb7• 6 years ago

What was the term? Was it a floating rate after a lock-in period?

The thing that makes 2.5% so incredible in the US, is that it's the rate for a 30 year fixed mortgage. Get one of those loan today and you'd still be paying 2.5% interest in 2049.

PopeDotNinja• 6 years ago

How do negative mortgage rates even work? My brain doesn’t understand that. Does the bank make money on fees or something? -1% mortgage rate and 3% in processing fees?

MattGaiser3• 6 years ago

Come to Canada. You can get 1.49%.

remote_phone4• 6 years ago

Mine rate is fixed for 30 years, not just 5 years like Canada.

alisonkisk4• 6 years ago

Where? Web search is showing 3%.

xapata• 6 years ago

Have you heard of "points"?

peterwwillis• 6 years ago

So.... Is it a stupid time to get a mortgage and buy a house, or a fantastic time?

sokoloff9• 6 years ago

It’s a great time to refinance mortgage debt you already have. Whether it’s a great time to buy a house depends on the future demand for housing in the local area.

If you pay today’s price for a house in Palo Alto or condo in NYC and those areas fall in popularity, it could easily be a bad call.

coronadisaster2• 6 years ago

I'm hoping it's a good time to sell because I just sold mine for 3x what I paid for it 10 years ago. But there could still be a lot of inflation coming up.

hn_throwaway_99• 6 years ago

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well".

That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

remote_phone4• 6 years ago

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

alex_young2• 6 years ago

Why would that happen because the fed owns a lot of mortgage debt? I don’t see the connection.

JackFr4• 6 years ago

The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the US to buy goods from them.

Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.

robfitz• 6 years ago

Also:

* 70% of global trade is currently denominated in USD (oil markets, commodities, etc)

* US has a lot of debt to other nations

* USD is the global reserve currency, giving the US fairly unique economic power and security

If the USD gets printed into significant devaluation in order to support assets (like bonds, houses, corporates, stocks), then it reduces the real value of the debts that the US owes to other countries (since denominated in USD), which erodes their faith as lenders. Taken together, this:

* Erodes confidence in the USD as a global reserve currency and causes governments to look to other stores of value (e.g., government buying of gold has recently been at an all-time high)

* Artificially inflates asset prices, leading to a bigger crash later when the government support is unable to continue (due to reduced confidence from foreign lenders)

That's all pretty terrible for the US and USD, if it happens.

But there's also an equally credible (though counterintuitive) theory that the USD will actually go up in value (deflation) due to every other country in the world needing to take similarly drastic action and the US being destabilized the least (i.e., the least bad of a set of bad options and everyone rushing into USD and US investments for relative safety).

Plenty of very smart people are on both sides of this argument, but everyone agrees that we are buying ourselves some significant future pain.

nradov• 6 years ago

It is mathematically impossible for the "rest of the world" to dump US treasuries. If someone is selling then someone else is buying.

adventured2• 6 years ago

The ECB has 2x the portfolio size as a share of GDP as what the Fed does. The Bank of Japan's portfolio is about 4x the Fed on that metric.

Why isn't the Eurozone collapsing, with interest rates skyrocketing and the Euro imploding?

Somehow Japan is still managing - despite a public debt & budget situation several times worse than the US - with a GDP per capita still on par with Britain, France, and just below Germany. And yet all the armchair experts endlessly predict the demise of the US.

refurb7• 6 years ago

Countries are buying US gov't debt because: 1) they have a lot of USD due to exporting goods to the US and 2) it's one of the safest places you can park money.

Sure, it would be bad if they dumped treasuries (at a big loss), but why would they do that if they put the money there in the first place because it was safe?

082349872349872• 6 years ago

Wouldn't the worst case (from the US standpoint) scenario be if the USD strengthened over time, and all these low-nominal interest loans not only had to be carried at higher real rates, but eventually come due at more than the original principal?

throwaway4good• 6 years ago

The fed can keep interest rates low; it is literally what they are doing by buying the bonds.

In principle you should see higher inflation and a falling currency. However this policy (aggressive buying of all kind of bonds) has been persued by the Europeans and Japanese for years and it haven't really caused a collapsing currency or high inflation.

Some may argue that it suspends a natural reallocation of resources in the economy. And causes the economy to keep overallocating real resources into things like real estate and finance causing bubbles, malinvestment and zoombie institutions ultimately leading to lower growth.

However that assumes that you had a free market in the first place which you never really had.

donmcronald• 6 years ago

If you print money, but only give it to the top 10% who use it to prop up the stock market, does that cause inflation? I don't understand how America can pump a couple trillion dollars into the economy and it doesn't seem to have any impact. If the average person is getting any of that it should cause inflation, shouldn't it?

im3w1l• 6 years ago

Banks lending to people who cannot pay, and then selling the bonds to the fed. This becomes a handout both to banks, and anyone with lending access.

In the real economy it means that people will start -EV (negative expected value) projects. Because heads you win, and tails you default.

onlyrealcuzzo• 6 years ago

That works for bank executives, not shareholders or individuals.

Rury• 6 years ago

Yes it would be inflation - and you would most likely see inflation happen in only those asset purchases...

People incorrectly assume inflation means "the price of everything goes up".

Why is this incorrect assumption to make? Well because prices aren't merely dictated by supply, but rather supply & demand. Comparing inflated money supply to the total good supply is naïve, as this sort of analysis fails to consider the different demand between different goods.

As so, for a dumb example, if the FED just printed tons of money, enough to give each American $10m dollars, and each American said "I'm going to take this $10m in stimulus money, and invest it in Amazon stock", Amazon's stock price would inflate crazy! However, in this scenario meat prices wouldn't change at all, as none of this extra money spurred extra demand for meat - it only spurred demand in amazon stock...

This is predominantly why CPI is a garbage metric of inflation. It does not measure asset prices (such as stocks / real estate), and hence does not measure the inflation that is happening around us (the inflation we're seeing in assets like stocks & real estate).

And the end result is inequality. Those who own the inflated assets benefit from the inflated prices, while non-owners of the inflated assets are at a disadvantage. In this particular case, banks are benefitting from those who want to own a house, but don't already own one.

lvs2• 6 years ago

There would be no inherent problem with having the Fed hold this much debt, if the tax system then soaked up distortions in how the resulting stimulus was distributed into the economy. That is, if the tax system is structured to pull back currency from unproductive sinks before it yields inflation, then there's no problem with the Fed holding that debt.

A better structure, as others have pointed out, would be to have the Fed just hold the government's debt, so that allocation and taxation can both be managed by the government. At the moment, the Fed and Treasury (via Congress) are both competing to play an allocating role in the economy at the same time, with no real coordination or plan.

baconandeggs5• 6 years ago

OR...you could let nature run its curse and have those debts refinanced at real interest rates that reflected the actual production in the economy, or defaulted and have those assets and resources liberated, thus correcting the distortions which were product of the FED and the government in the first place.

lvs2• 6 years ago

Well, it all depends on what you think the purpose of an economic system is. Perhaps you'd just let the mortgage market blow up, if your only concern on this Earth was to know exactly what the market price of an asset was. But you'll have to explain to me how you think the distortions are the product of Federal Reserve and government policy, since I am not following whatever you're alluding to. The distortions I see are inherent and inevitable products of the economic system we currently have, not the product of any specific policy. In fact, these distortions seem to be the product of an absence of an adequate policy to alleviate them.

snarf21• 6 years ago

You're so right. It is clear that monetary policy isn't enough. We need Congress to step in with a real plan for fiscal policy adjustments. The Fed can just do whatever they want so they do. Congress fights to get anything moving. The issue is that this asset bubble continues to grow and near zero interest rates isn't doing anything but inflating asset prices. We need fiscal policy to start growing the GDP and we need it yesterday.

JMTQp8lwXL5• 6 years ago

I would be curious to see analysis for what home prices would be with 0 Fed intervention. Also, I don't understand how millennials aren't supposed to see this figure and immediately feel a sense of rejection, that the housing market is some form of a pyramid scheme, where you had to get in early to have a chance.

scrumbledober• 6 years ago

well as a 30 year old looking for my first home who grew up in the bay area... yeah that's exactly what I feel.

wyre_• 6 years ago

As a 26 year old the feels stuck working minimum wage jobs I feel the same way. Similar to the college industry as well.

refurb7• 6 years ago

Not to be snarky or obvious, but you should do what the people in the past did - find a better place to live that allows you to buy a home more easily.

That's one of the reasons why there was a big migration to places like LA. Lots of jobs and cheap land to build on.

To me, SF is like NYC. Unless you got in early or are one of the 1%, it's not a great place to try and build a life in (if you're looking to own a home).

throwaway6734• 6 years ago

Consider Baltimore. There's some tech work in the city + a good chunk between Baltimore & DC. Areas like Locust Point, Roland Park, Hampden, Fells Point, etc.

chishaku• 6 years ago

I would be curious to see analysis for what home prices would be with 0 Fed intervention.

Just imagine a graph where asset prices don't only go up.

refurb7• 6 years ago

I would be curious to see analysis for what home prices would be with 0 Fed intervention.

It is an interesting thought experiment. From what I've gathered, any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.

For example, FHA offering 5% down payments instead of a standard 20%, just means every first time buyer can now pay 15% more (approximately) for a house. In hot markets, the prices rise quickly to reflect that and everyone is in the same position as before.

It obviously benefits buyers in non-hot markets. It's pretty nice to put $7500 down in the mid-west for a house.

I assume that without any federal intervention, the housing prices would be as accessible as they are today, prices would just be lower so that that the same number of people could afford 20% down and 5-year term mortgages with the resulting interest rate risk.

postingawayonhn• 6 years ago

For example, FHA offering 5% down payments instead of a standard 20%, just means every first time buyer can now pay 15% more (approximately) for a house.

Assuming they had the same deposit available they would theoretically be able to pay 300% more. Of course they probably wouldn't be able to demonstrate their ability to service a loan that large.

harry8• 6 years ago

any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.

If a large number of mortgages forclosed without the fed this would put a hell of a lot of downward pressure on prices. Economic carnage style. That hot market. It's getting pretty cold. Does that make houses more affordable for those frozen out? Or are they now unemployed with the zero intevention and/or unable to get a loan in that cold market making the benefit from the carnage nothing?

Whether it's the right thing to do for the overall economy and all in it, keeping house prices up is clearly something the boomers want so they can keep their very large gains from having got in early. Younger generations may look at this and see more than simple coincidence.

danvasquez29• 6 years ago

when people are living (and budgeting) paycheck to paycheck, with low interest rates, the prices go up a bit more than 1:1. It becomes all about what monthly payment you can afford.

johnchristopher• 6 years ago

In hot markets, the prices rise quickly to reflect that and everyone is in the same position as before.

Except for the government's budget, right ?

glenstein4• 6 years ago

just means every first time buyer can now pay 15% more (approximately) for a house

Wait, what? Wouldn't it mean that a pool of prospective buyers that couldn't afford 20% but can afford 5% are now able to buy a house? That's a shift in the structure of the market rather than just a change being "priced in" for the same set of buyers.

In hot markets, the prices rise quickly to reflect that and everyone is in the same position as before.

I would think this is the kind of question where we need data. I like to think I respect the exercise of thought experimenting more than your average person, but in this case, it seems to illustrate how thought experiments serve to answer questions by restating their core assumptions rather than exposing them to challenges in the way data would.

zalkota• 6 years ago

Are you just disregarding the mortgage payment?

ced• 6 years ago

It is an interesting thought experiment. From what I've gathered, any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.

It benefits home owners, which (at least in Canada) makes up the majority of the voting base. Like GP said, it's at the expense of the next generation of buyers.

gwd3• 6 years ago

From what I've gathered, any intervention by the government to make housing more accessible, just gets priced in pretty quickly, removing the benefit.

You say "any intervention", but you've only mentioned interventions that give more money. Other interventions:

1. Encouraging developers to build new properties, particularly properties for low- and medium-income tenants

2. The government building low- to medium-income housing themselves.

The problem with any policy, of course, which aims to bring down the prices of houses makes everyone who's already bought a house very unhappy.

_Anken• 6 years ago

It obviously benefits buyers in non-hot markets. It's pretty nice to put $7500 down in the mid-west for a house.

Unfortunately banks won't loan what they see as small mortgages like that. This leaves the lower priced homes only available to landlords buying cash. I live in a home like this myself - all the banks would happily loan me $215,000 with $35k down, but no bank would loan me $15,000 to buy a $50k house. There's many people renting in my city that have decent credit that could easily afford one of these lower cost homes, but instead the houses stay empty or get turned in to rentals.

johnrgrace• 6 years ago

FHA offering 5% instead of 20% down payments means first time buyers can buy 4x the house.

afpx• 6 years ago

The pyramid scheme isn’t a new thing, sadly. The chart for median home prices shows it starting at least as far back as 1997. Maybe as far back as 1976.

JMTQp8lwXL5• 6 years ago

Interest rates on 30 year fixed mortgages have been declining since 1981: https://fred.stlouisfed.org/series/MORTGAGE30US

baconandeggs5• 6 years ago

Just look at the chart on page 20 of this Fed paper (the Fed was created on 1913, the fiat dollar became the global reserve currency in the 70s after years of debasement to pay for the cold war, vietnam, etc.)

https://www.dallasfed.org/-/media/documents/institute/wpaper...

wahern3• 6 years ago

Perhaps the better chart is on page 21 (Figure 16), where as compared to all the other countries surveyed the U.S. is at the far low end of housing price inflation. In fact, unless I'm missing something it comes in dead last among all 14 countries at the end of the sample period, 2012.

wonder_er• 6 years ago

Also, I don't understand how millennials aren't supposed to see this figure and immediately feel a sense of rejection

Millenial here. 100% agreed with this. Feels like a big blind spot in the boomer crowd. They don't seem to see the seething, roiling, overpowering resentment their entire generation is receiving from many, many people that currently don't have much power in society.

A politician wants to win office, and lower the probability of a civil war.

Recognizing politicians historic-low approval ratings, a politician would propose something radical:

1. Make student loan debt equal under the law to any other form of debt

2. Implement a national zoning system similar to Japan's zoning[0], eliminating the housing crisis, rolling back a century of racist and exclusionary laws that ruin lives and act as an enormous drag on everyone in the country. Hundreds of millions of Americans are now richer and much more at peace with each other.

Said politician would instantly win the popular vote. Unfortunately, these policy positions are at odds with power brokers in the USA, so no politician will ever seriously propose these policies, or they'll get to office, and be informed that these policies are no longer going to appear in their speeches.

[0] https://urbankchoze.blogspot.com/2014/04/japanese-zoning.htm...

rebuilder2• 6 years ago

What would the effects of changing the student loan system be? I assume you mean to increase the creditor's risk to levels comparable to other types of debt. Personally, I'd expect that to result in higher interest rates for student debt, and more stringent eligibility requirements. IOW, a higher barrier to entry to education.

Maybe that would be good, it depends on how the price of education would react, and in whether a high level of education is seen as a positive or not.

paulgb3• 6 years ago

I'm surprised #1 isn't proposed more. It's not really even that radical when you consider that the Overton window now includes completely eliminating student debt.

code4tee• 6 years ago

If student loan debt was treated like any other debt then few if any students would get loans, unless their parents had assets to put up as collateral. So long as the financial burden of education falls on the student first then this is unlikely to change.

From a financial perspective it’s a terrible product to sell... tons of money to someone with little to no financial assets, iffy prospects of sufficient future income and no underlying assets that the bank can put a lien against in case of default. The problem is not the loans, it’s the whole higher education system that needs a total overhaul including the utility and price of higher education. The current system is based on the idea that many people’s parents encountered where a good summer job and maybe a bit of savings was more than enough to pay for a decent college degree!

jcfrei2• 6 years ago

What are you implying with "these policy positions are at odds with power brokers in the USA"? The politician you describe would most likely not win the popular vote because the most important voting base for most politicians is the 50+ crowd (in the US and most other Western countries) and this demographic wouldn't care too much about these issues. It's really a generational conflict.

lkrubner• 6 years ago

Prices would be very low and unemployment would have averaged 50% for the last 12 years.

I’m half joking, but if the Fed did nothing then we would still be in the middle of the Great Recession. Or consider the British “Great Depression” of the late 1800s — that lasted 20 years because the pound was over-valued.

brmgb2• 6 years ago

The interesting question is what would have happened if the USA had directely nationalized and restructured the failing banks rather than loan them money after the subprime mortgage crisis and if it had supported the economy through productive investments in infrastructure rather than lowering the Federal funds rate.

smooth_remmy• 6 years ago

Both Democrats and Republicans acknowledge that the Great Recession was caused by government housing policy. So presumably - if we had a small government with no Fed - we would also have no Fannie Mae and the Great Recession would have never happened.

david927• 6 years ago

That's going to happen anyway but now the Fed will have no power over ameliorating any of it.

zxcb1• 6 years ago

Those who believe in the self-organization of markets would not interfere, rather work outside of them with regulation and social safety nets.

bfrog• 6 years ago

Maybe, but the fed exit strategy will be inflation not default would be my bet. Defaulting or causing people to default on debt is how we truely get another great depression. Inflating our way out, if controlled, might be ok. Maybe. It'll ruin the dollar as the world reserve though would be my thinking and many others. Not my idea here, just makes sense to me.

JMTQp8lwXL5• 6 years ago

If interest rates can't go any lower (and there isn't much room, unless we think negative yield mortgages are possible), and the Fed chooses to inflate the currency (which I concur, would be a most likely response, as the alternatives have far worse consequences), then the real value of homes will decline-- though the nominal dollar value could stay the same.

christkv• 6 years ago

More interesting than they owning 1/3 of the mortgages is what quality is the mortgages they own. Are they all sub prime quality? If they are is this a strategy to save banks from a default crisis in the near future without taking the systemic hit like 2007.

ars• 6 years ago

Can the Fed actually make money on all those mortgages?

somebodythere• 6 years ago

The Fed can make (create) money whenever it wants. That is its raison d'être.

raverbashing• 6 years ago

On a similar note, the developments on commercial real estate loans are worrying (this has been brought up by discussions of commercial rents with unrealistic prices) https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...

nostromo• 6 years ago

The headline isn’t correct.

There is $17T in US mortgage debt. The Fed has backed $2T of that via mortgage backed securities, up from $1T pre-Covid-19.

That’s ~11% not 1/3.

The article itself mentions this, but decided to use a misleading headline instead.

darrenf• 6 years ago

The amount expressed in dollar terms needn’t match the quantity of mortgages, so both can be true - no?

onion2k• 6 years ago

The article states "The Fed now owns almost a third of bonds backed by home loans in the U.S." which is where the headline comes from.

I think the reason why it's important is that owning 'mortgage backed debt' means you own an instrument sold by the mortgage underwriter rather than the mortgage itself. If the mortgage payer defaults and the underwriter fails you have no way of recovering the debt. A mortgage backed bond is tied to the actual property, so if the payer defaults you can sell the real estate to get the money back.

That might be completely wrong though. The extend of my financial education is watching The Big Short.

divbzero• 6 years ago

Thanks for pointing out the misleading headline. I double-checked your dollar value for total US mortgage debt and it’s in line with what the Fed reports. [1]

The article correctly shows that the Fed is still buying more government debt than mortgage backed securities. As of June 2020 the Fed owned over ⅕ of all US government debt and over ⅓ of longer-dated US government bonds. [2]

[1] https://www.federalreserve.gov/data/mortoutstand/current.htm

[2] https://www.economist.com/finance-and-economics/2020/06/18/t...

koheripbal• 6 years ago

As of June 2020 the Fed owned over ⅕ of all US government debt and over ⅓ of longer-dated US government bonds.

That's one-fifth, and one-third, respectively for anyone else having a hard time reading it.

cryptica• 6 years ago

By protecting the price of real estate through mortgage purchases, the Fed is undermining the legitimacy of private property and the concept of private ownership. This is not going to end well.

natcombs• 6 years ago

> Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing.

8x increase over QE is crazy. Is that 8x mortgage bonds or 8x bonds in general?

mrep5• 6 years ago

US treasuries mostly in late march. Demand for dollars skyrocketed due to covid-19 and people were selling their treasuries to get dollars causing treasury yields to spike so the FED started buying $75 billion in Treasury securities per day to supply liquidity to the Treasury market and ended up buying over $1 trillion in Treasury securities within a short 3-week window.

More analysis about it at https://www.lynalden.com/august-2020-newsletter/

b34r• 6 years ago

Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country? (Assuming the acquisition process isn’t slow AF because government.)

Real estate seems like a pretty important part of the economy and, more importantly, the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies.

mrfusion2• 6 years ago

It didn’t go so well with college loans.

Any market government gets into gets distorted.

ceejayoz• 6 years ago

Most of the rest of the developed world doesn't really consider college a market in the American fashion, though.

Half-hearted government is a problem; education and healthcare both suffer in the US from trying to split the baby Solomon-style.

charlesu7• 6 years ago

Maybe higher education shouldn't be a market.

qeternity4• 6 years ago

Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country?
Real estate seems like a pretty important part of the economy...

You just answered your own question. Governments do not have a history of distributing scarce resources effectively. You need various market forces.

the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies

This is not what happens. As you said - it's artificial. Markets, like the internet, route around this sort of censorship. Any attempt to make housing artificially more affordable will have the effect of increasing demand (by design). When you increase demand, prices rise. And thus becomes unaffordable again. You can then increase the subsidies further to try to offset your original manipulation, which will only worsen the problem. This is precisely what happened in the 90s/early 00s and the result was the 2008 housing bubble.

horsemessiah• 6 years ago

Markets are basically anarchy... there are countless examples of markets inefficiently allocating resources (homes, for one). Not sure I buy this.

black_puppydog• 6 years ago

Governments do not have a history of distributing scarce resources effectively.

To be fair, "various market forces" also don't have the best track record of distributing resources, especially scarce ones. Somehow those always end up being "distributed" into the same few hands...

jeffreyrogers4• 6 years ago

It's not like the market is doing a good job distributing scarce resources either, particularly in the case of housing.

jdashg• 6 years ago

Fortunately, we don't actually need to make housing more affordable to the whole market, just the ones for whom it matters: the poor.

tenpies• 6 years ago

Because the government is a terrible market participant. It has infinite money, they suffer no consequences, and ideologues come up every so often and let their agendas take over any economic objective the program had in mind.

This is happening now more than ever with the Democrats seemingly deciding that the US Fed has the additional mandate of fighting systemic racism.

NationalPark• 6 years ago

The Fed board is appointed by the President and approved by the Senate. The current chairman was appointed by Trump. The article doesn't even mention racism so I guess this is probably a throwaway culture war post but I have a hard time seeing how this of all things could be pinned on the Democrats. If anything it's the anti-public-health Republicans who let the pandemic get out of control and lead to a Fed buying spree.

OCASM2• 6 years ago

Government messing with the housing market is what caused the 2008 recession. I think that's a very good reason not to want that.

qes• 6 years ago

You know the Federal Reserve is not a government agency, right?

mgh2• 6 years ago

This is actually a good trend. Just compare this to the alternative. San Francisco and Seattle, where the tech elite overprice the non-tech population, decimating local communities and worsening the homeless problem. Vancouver and Irvine, where Chinese elite launder money to buy real state as investments (and leave them empty) rather than living spaces, resulting in the same problem.

This all might be a silver lining of the pandemic: combined with remote work, people are no longer confined to one place - avoiding discrimination of all sorts (from real state to immigration). The truth is that if the rich are left unchecked, greed can run rampant and create more harm than good- ex: healthcare, stock bubbles.

HashThis• 6 years ago

The way crony capitalism theft works is to look for a way to steal. The way to steal is now clear. Manufacture blow-up mortgages and they blow up on the mortgage buyers (Fed).

S&L 1980s bailouts were an exact copy of 2008 Mortgage bailouts. Theft in creating mass blow-up real estate loans. This is a proven crony capitalism way to steal.

When the Fed has to politically buy them, then crony capitalists will find a way to get them buying blow-up mortgages in 5 or 10 years.

mcculley2• 6 years ago

When I was a boy my elders told me that we had to win the Cold War or we would end up with the government owning everything.

tengbretson• 6 years ago

Well the federal reserve isn't part of the government, so hurray for us I guess.

havetocharge2• 6 years ago

Wikipedia says that it's under the jurisdiction of the Federal government of the United States. So maybe depends on how you define 'government'?

https://en.m.wikipedia.org/wiki/Federal_Reserve

mcculley2• 6 years ago

I guess we need another word for a monopoly central bank defined by federal law that controls the value of our resources.

coronadisaster2• 6 years ago

The homes around here (suburb) fly off the shelves even if prices are higher then the last bubble (~2007)... not sure what is going on. Could people be moving away from large cities because of covid-19 and remote work opportunities?

SilasX• 6 years ago

@dang should probably link to the main Bloomberg story rather than a shorter, opinionated site/blog:

https://www.bloomberg.com/news/articles/2020-09-01/fed-s-mor...

felipe_ii• 6 years ago

I don't understand what is being used as the denominator to generate this 1/3 number in the headline. A quick search shows that the US MBS market is about $10.3 trillion in size [1] - the actual mortgage market is larger (what nostromo mentioned earlier). Putting some recent numbers [2] over the size of the MBS market would show that the Fed owns a little less than a 1/5 of all US MBS.

Also, he mentions that the Fed has been purchasing roughly $100 billion per month in MBS securities since April, but this leaves out the fact that a non-insignificant number of MBS in their holdings are either i) reaching maturity, or ii) being prepaid. The second issue is more prevalent now - with the low-rate environment that exists in the US many people are refinancing their mortgages to take advantage of lower rates, but in any case it isn't uncommon for mortgages to be paid off before their maturity date. I don't know what the net figures are, but what I'm trying to say is that purchases of MBS != growth of MBS holdings.

I seriously think this author has somehow conflated the size of the SOMA assets with the size of the MBS market - continuing growth of MBS at $100 billion for the rest of the year, leaving all else equal, will give us about $2.4 trillion of MBS over a denominator of $7.4 trillion - which would give us about 1/3.

[1] https://www.sifma.org/resources/research/fixed-income-chart/ [2]: https://www.federalreserve.gov/releases/h41/current/

_nalply• 6 years ago

Maybe some people have discovered a money perpetuum mobile: A bank creates mortgages inflating the collateral then sells them to the Fed. The bank walks away with a surplus and the Fed explains that they are saving the economy by bailing out the bank.

mensetmanusman• 6 years ago

We need massive govt. investment in modular housing manufacturing research with a standards consortium so that homes can click together with utilities :)

The Fed now owns nearly 1/3 of all U.S. mortgages

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