Fed mortgage-backed securities purchases

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The Fed mortgage-backed securities purchases

Like a similar program at Treasury, the Federal Reserve purchased mortgage-backed securities backed by mortgages guaranteed by the GSEs in order to keep the housing mortgage market functioning. The Fed ended the program on Mar. 31, 2010.[1]

Wall Street Bailout Accounting
(back to main table)
FED MORTGAGE-BACKED SECURITIES PURCHASES
Balance Sheet
Disbursed*: $1,128.4B[2]
Current outstanding: $911.9B[3]
Public Funds
Maximum at-risk: $1,250B[4]
Current at-risk: $1,101.6B[5]

* See the methodology and glossary for definitions of "disbursed," etc.

Funding agency and aid type

The funding agency was the FRBNY.

Purchasing GSE mortgage-backed securities from investors.

Who benefits

Background

FRBNY:[6]

“What is the policy objective of the Federal Reserve's program to purchase agency mortgage-backed securities? The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally…

“What securities are eligible for purchase under the program? Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. Eligible assets may be purchased or sold in specified pools, in "to be announced" (TBA) transactions, and in the dollar roll market.

“What is the investment strategy that is employed? Investment managers will largely employ a passive buy and hold investment strategy in accordance with investment guidelines prescribed by the Federal Reserve. Purchases are guided by general MBS market conditions, including, but not limited to, supply and demand conditions, market liquidity, and market volatility. The agency MBS program will involve the outright purchase of a total of $1.25 trillion in agency MBS by the investment managers on behalf of the Federal Reserve by the end of the first quarter of 2010. As noted in the December 2009 FOMC meeting minutes, the $1.25 trillion purchase amount does not contemplate the reinvestment of MBS paydowns. The pace of purchases will moderate gradually to promote a smooth transition in markets. The program will gradually reduce the average weekly purchase amounts of agency mortgage-backed securities, starting with purchases conducted during the reporting week beginning Thursday, September 24, 2009. The pace of purchases may be adjusted, as necessary, based on input from the investment managers about market conditions and the impact of the program. The investment managers are required to purchase securities frequently and to disclose the Federal Reserve as principal.

“How are purchases under the agency MBS program financed? Purchases will be financed through the creation of additional bank reserves.

“What is the legal basis for the agency MBS purchase program? Purchases of agency MBS in the open market, under the direction of the FOMC, are permitted under section 14(b) of the Federal Reserve Act.”

SIGTARP:[7]

“Purchases of GSE-Guaranteed MBS — Total Potential Support: $1.25 Trillion. In addition to purchasing the direct obligations of GSEs, the Federal Reserve is further supporting the mortgage markets by committing to purchase up to $1.25 trillion of MBS that have been guaranteed by the GSEs. This purchase line was originally announced on November 25, 2008, with a maximum purchase limit of $500 billion, but this amount was raised by $750 billion to $1.25 trillion on March 18, 2009.”

Via Prins:[8]

“In addition to purchasing the direct obligations of GSEs, the Federal Reserve is further supporting the mortgage markets by committing to purchase up to $1.25 trillion of MBS that have been guaranteed by the GSEs. This purchase line was originally announced on November 25, 2008, with a maximum purchase limit of $500 billion, but this amount was raised by $750 billion to $1.25 trillion on March 18, 2009.”

Notes

With a buy-and-hold investment strategy and MBS with up to 30 year terms, the Fed could be holding onto these securities for decades. The program is authorized under section 14(b) of the Federal Reserve Act. It is financed through the creation of additional bank reserves.[9]

Articles and resources

Related SourceWatch articles

References

  1. Sewell Chan, "Fed Ends Its Purchasing of Mortgage Securities," New York Times, Mar. 31, 2010.
  2. Federal Reserve Bank of St. Louis, “Series: WMBSEC, Reserve Bank Credit - Securities Held Outright - Mortgage-Backed Securities”, June 29, 2011. Figure is for peak holdings in account.
  3. Federal Reserve Bank of St. Louis, “Series: WMBSEC, Reserve Bank Credit - Securities Held Outright - Mortgage-Backed Securities”, June 29, 2011.
  4. Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), “Quarterly Report to Congress July 21, 2009”, p. 146.
  5. Federal Reserve Bank of St. Louis, “Series: WMBSEC, Reserve Bank Credit - Securities Held Outright - Mortgage-Backed Securities”, July 18, 2010.
  6. Federal Reserve Bank of New York, “FAQs: MBS Purchase Program”, updated Feb. 17, 2010, accessed Mar. 12, 2010.
  7. SIGTARP July 2009 report, p. 146.
  8. “In 2009, the Fed earmarked up to $1.25 trillion to buy investments based on home loans.”
  9. Federal Reserve Bank of New York, “FAQs: MBS Purchase Program”, updated Feb. 17, 2010, accessed Mar. 12, 2010

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