Home News The Fed’s $2.7 trillion mortgage problem

The Fed’s $2.7 trillion mortgage problem

by admin
0 comment
Data: Federal Reserve; Chart: Axios Visuals
Data: Federal Reserve; Chart: Axios Visuals

If you have borrowed a mortgage in the last two years, it is likely that the holder of the loan is the central bank of the United States. This is the result of financial stimulus measures across the pandemic.

Important reason: The FRB will face a series of political and economic problems as it seeks to break away from mortgage lending by shrinking its portfolio of mortgage-backed securities.

  • Problem: Pulling yourself out of this market risks creating a violent political blowback that will disrupt the housing industry and incur financial losses.

With numbers: Back in February 2020, The Fed owned $ 1.4 trillion in mortgage-backed securities, And that number was declining rapidly. However, when the pandemic took hold, the central bank launched a new round of bond purchases (known as “quantitative easing”), expanding its number to $ 2.7 trillion.

  • Until recently, this policy contributed to ultra-low mortgage rates that stimulated home buying and refinancing activities.

Play status: Currently, the Fed is trying to tighten monetary policy to combat inflation and wants to shrink its portfolio. It may be easy to say.

  • The Federal Reserve says it will reduce its mortgage portfolio by up to $ 35 billion per month by September. Focus on “to”.

in fact, The numbers will probably fall below that.

  • Reason: So far, the Fed is trying to reduce its holdings as it repays its securities. However, with mortgage rates rising significantly in recent months, people have little incentive to sell or refinance their homes. Therefore, these mortgages can stay on the Fed’s books for a long time.

It leaves the Fed With an unattractive option. You can continue to play a large role in the housing market and simply accept that your balance sheet will be larger than you want.

  • Alternatively, we may start selling securities in the open market. The minutes of the March policy meeting may occur in the future.

What they are saying: “Let’s speed up our ongoing program, but once it’s started, it’s worth taking a look at what’s happening with mortgage-backed securities. [securities] On the balance sheet. ” Federal Reserve Bank of Richmond Governor Thomas Barkin told Axios.

  • “If we don’t go primarily to the Treasury balance sheet that we want, I’m certainly accepting a targeted and disciplined way to market,” he said.

Yes, but: It will be created It’s a problem of its own. If the FRB sells low-interest mortgage securities at a time when prevailing interest rates are much higher, it will incur significant financial losses that reduce the amount of money the central bank will return to the Treasury.

  • In that scenario, expect officials to face tough questions from Capitol Hill and explain why they lost billions of dollars on behalf of Americans.
  • In addition, the sale could further boost mortgage rates at a time when the housing industry is already beginning to moan under the pressure of rising interest rates. Homebuilders, realtors, and other influential trade associations inform elected officials of their misfortune.

Conclusion: The Federal Reserve’s pandemic action fueled the housing boom. It may be bad news for housing when it tries to withdraw that support — and the Fed is standing at Capitol Hill.

You may also like