Fed and Treasury MBS purchase programs are big

Sunday, March 15, 2009

Since the Fed and the Treasury started their respective mortgage-backed securities (MBS) purchase programs, mortgage rates are down one-full percentage point. The government intervention in the mortgage market is very big, certainly the reason that rates are tumbling.

The chart illustrates the month-end (or mid-month in the case of March) conventional mortgage rate and the net-accumulation of MBS on the part of the Federal Reserve (see the NY Fed) and the Treasury (see Table 6 of its monthly statement). The correlation is clear: the government's intervention in the MBS market, where to date the Fed has purchased $217 billion and the Treasury holds another $107 billion, resulted in a 1% reduction in the average conventional mortgage rate.

The government intervention has been sizable!

To add some perspective on the size of the intervention, the chart illustrates the annual net-issuance of Agency and GSE-backed MBS, or the type of MBS paper that the Fed and the Treasury are accumulating. In all 4 quarters of 2008, $501.5 billion of MBS was issued. Since just September (6 months ago), the Fed and the Treasury have acquired $324 billion in MBS, or 65% of the total net-issuance in 2008. That's big intervention.

If the government was not buying MBS in bulk, mortgage rates would undoubtedly be sitting above 5.03%. I imagine that low rates, alongside further price declines and the stimulus tax credit, will spur some new demand for housing. However, record job declines and the ongoing delevering of households (reducing debt burden) are likely to hamper at least part of the government's plan.

Rebecca Wilder


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