Monday, January 5, 2009

FYI: The Fed started buying MBS today

Today, the Fed announced that it (the NY Fed) began purchasing GSE mortgage-backed securities (MBS) today:
The Federal Reserve Bank of New York today began purchasing fixed-rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Selected private investment managers are acting as agents of the New York Fed in these purchases.

Summary data detailing these operations will be available on the New York Fed’s website beginning Thursday, January 8, 2009, and will be updated on a weekly basis each Thursday.

This program, first announced on November 25, 2008, is intended to support the mortgage and housing markets and foster improved conditions in financial markets more generally.

RW: You can find out more about this program here. Basically the Board of Governors has authorized the purchase of GSE-backed (Fannie Mae, Freddie Mac, and Ginnie Mae) MBS on the open market via the creation of reserve balances. This $500 billion transaction will occur periodically throughout the second quarter of 2009; it should help to drive mortgage rates down farther.
Rebecca Wilder


  1. Rebecca: I think (at first thought) this is a very good move. The housing situation *must* be unfrozen.

    I was just posting in a UK forum (and Brits find the concept of gov't underwritten mortgages completely abstract, no matter how many times it is explained to them, and no matter how much their own Gov is doing it indirectly) about the FHA. In fact, perhaps it's time to review this for Americans too!

    [What is the Federal Housing Administration?

    The Federal Housing Administration, generally known as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.

    What is FHA Mortgage Insurance?

    FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default. Loans must meet certain requirements established by FHA to qualify for insurance.

    Why does FHA Mortgage Insurance exist?

    Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan. There is more flexibility in calculating household income and payment ratios. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost to the homeowner will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property -whichever is longer.

    How is FHA funded?

    FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.

    The History of FHA

    Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965.

    When the FHA was created, the housing industry was flat on its back:

    * Two million construction workers had lost their jobs.

    * Terms were difficult to meet for homebuyers seeking mortgages.

    * Mortgage loan terms were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment.

    * America was primarily a nation of renters. Only four in 10 households owned homes.

    During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war.

    In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA's emergency financing kept cash-strapped properties afloat.

    The FHA moved in to steady falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s.

    By 2001, the nation's homeownership rate had soared to an all time high of 68.1 percent as of the third quarter that year.

    The FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio.

    In the more than 60 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world. HUD has helped greatly with that success.]

    Be aware, readers, that the website *is not* the real FHA!

    I hope to get back to the FHA in a lter post. Note that it *is not* a GSE! It is completely 'in-house'. The GSE shareholders (now a small minority compared to the Treasury's stake) will be rewarded for their incompetence (admittedly, indirect but still buying into incompetence).

    I really don't know why the GSEs aren't nationalized completely even if the remaining shareholders are 'bought out'.

    Note that the FHA can still claim that:
    **FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.**

    Sometimes "Central Planning** is the way to go! Is state that with caveats, however.

    RW writes:

    [Selected private investment managers are acting as agents of the New York Fed in these purchases.}
    And *that* is a concern! Guess who these 'private investment managers' are?

    The very same ones that made such a mess to begin with.

    I think this move is an excellent one, at least in theory. The devil will be in the implementation.

    The FHA has worked fine for years, up until the fear of "paperwork" drove applicants to get loans from crooks and doubledealers. Very close oversight will be needed on all of this.

    The US had this all figured-out beautifully years ago...and blew it!

    I look forward to much more discussion on this.

    That is *profound* news, Rebecca!

  2. The FED could buy up the entire Federal Deficit this year by raising reserve ratios against commercial bank deposits.

    & there is no argument among economists that banks pay for what the already own (deposits). The contention lies with whether the loans & investments originated from the CBs is the same as that by the financial intermediaries.

    Economists hold that each financial institution's contribution to GDP has the same impact. I.e., commercial banks are financial intermediaries.

    Even so, the effect of reducing interest rate ceilings for commercial banks and the subsequent transfer of those funds to intermediaries decreases long-term interest rates and increases the profits of both financial institutions (because the funds never leave the CB system).

    REG Q in reverse for the CBs but not the thrifts. Lower long-term rates, higher profits, and larger contributions to real growth.

  3. This approach was used in the 1966 housing crisis.