Focus: How to Sell Its Mortgage Securities” I read Hilsenrath. He
writes well, he knows his stuff and he is connected. I think he is
blowing “Fed Speak” at us with this one. Here’s the link,
you decide.
Reading the article I was left with the impression that JH had used both
public information and the thinking behind some ‘off the record’
conversations with Fed officials. The Fed does not tell what it is going
to do unless it wants to. Ever. Not even to Jon Hilsenrath. So when you
see this “Fed speak” it should be considered in that light
The article is a rehash of the Feds balance sheet dilemma. It raises the
question of, “What’s the Fed going to do with all that paper it just
bought?”
On reading, you are supposed to get this warm feeling that the Fed is
acutely aware of the size, scope and significance of their QE actions.
That these steps were just a ‘natural’ consequence to the “Emergency”
and now that we’re returning to normal the “Emergency Measures” are
going to be unwound. No problem. They have this completely under
control.
The article (I think) leaks the information that next weeks Fed meeting
will continue the ZIRP Forever language (at least six more months). It
also confirms that there will be some more of the “experimental” reverse
repos in the coming weeks.
JH points to the public comments of some Fed members indicating that
that they actually want to sell some of what they own. To me this is
just noise to make it appear that there is a real debate. There will be
no Fed selling of MBS for at least 24 months. The quote from Bernanke on
this topic:
"I currently do not anticipate that the Federal Reserve will
sell any of its security holdings in the near term, at least until
after policy tightening has gotten under way and the economy is clearly
in a sustainable recovery."
This is completely open ended. He might as well have said, “We will
start selling when the terror threat level is returned to green.”
Don’t hold your breath.
So the article leaves us with the inescapable conclusion that the
Government effort to prop up the mortgage market is now completed and
the next phase is going be a period of relative balance sheet stability
followed by a plan to unwind the mess. That is peachy news and we
should all be very happy, right?
Well I am not. Some facts here. The Fed dramatically (and predictably)
slowed its purchases of MBS in March. They have made no new purchases
since then. So they have lived up to the bargain, but the other arm of
the federal financial puzzle started buying in MBS at just the time the
Fed stopped. The Treasury department through Fannie and Freddie started a
program that commenced in March and will continue for some time to come
where they will be buying in $100rds of billions of MBS. So the beat
goes on and on. From our friends at Fan and Fred:
F/F will buy in defaulted mortgages and pay the holders of the MBS cash.
This will come to the investors in the form of a pre-pay of principal.
It is very normal for a portion of the principal to be returned to the
investors on a monthly basis. The F/F steps just accelerate the process.
When the investors (big funds) get the principal back they (usually)
turn right around and plow it back into new MBS issues.
The steps taken by F/F are completely different in form to the Fed’s
purchases of MBS but in substance they have the same affect. It
decreases the outstanding mortgages, and therefore influences mortgages
spreads. Keep the game going for a bit longer.
I admit that I am an old cynic and generally assume the darkest motives.
But the timing of F/F to start their buy back programs in March and
April at precisely the same time that the Fed is “finished” with its
business is no coincidence. It was planned and coordinated months ago.
This is just more manipulation. Bernanke understands this and probably
had a hand in the timing of the F/F buyback programs.
The fact that the government is continuing to impact mortgage rates was
not mentioned in the JH article. In fairness, his piece was directed to
just the Federal Reserve's role in the buy ins. But I don’t think we
are getting the full story from the WSJ. We are getting what the Fed
wants us to hear. The real story is that Washington simply can’t stop
interfering in the mortgage market. If D.C. really did stop, we would
have a problem. And they know it.
The Fed is very different from most institutions or banks or frankly anyone else that owns an asset. As long as the interest continues to be paid on the mortgage bonds they've purchased they don't have to mark down the value of them and can mark them to fantasy, it's a function of their purchasing ability. Second, they have the printing press, if an asset losses 5%, they can print that 5% to make it whole again thus supporting a large portion of the market. This will help to slow the deflationary effects of the housing market and also helps most banks to keep their bonds marked high since they most likely sold their worst stuff to the FRB knowing the conditions.
Ben has no reason to raise rates yet, he's just been put back in office for 4 more years, and has no reason to begin selling assets. I would be surprised to see the 'extended period' language drop this year, perhaps a rate hike in 2011. As stimulus fades out in Q2, we'll most likely begin the economic descent into a 'W,' based on the severity of this I would play wait and see instead of trying to guess FRB action.
Think of it as garbage in, garbage out. The Fed as part of QE took out the garbage since March of 2009, to the tune of $1.2 trillion of agency MBSs. Now the garbage is piling back up again, and there are different trash collectors that are active, all government related. Or, you can let the trash pile up inside the agencies, so they get bigger, and bigger, and bigger, until one day they just can't hold any more. That's when QE 2.0 will start.
You could also stop piling up trash, by ceasing the Fannie-Freddie programs of buying up originated mortgages. But since there are no other buyers, and the private securitization market is dead (with some notable electro-shock induced twitches here and there, to which some point and cry, "it's alive! See, it moves!"), if you did that, bye bye housing.
Thansk BK;
good catch, i was expecting that they were buying from somewhere but didn't know where.
This has been pretty well known since F/F announced their buy back program but it too is not an open ended commitment. When F/F's program is complete what do you think will be 'phase III' or does the end of this mean the government will finally be out of bullets?
They announced in March and the other in April. I talked with someone who is closer to this than I and he said the Agencies were alternating their buys. One this month. the other next month. It is not know how long this could last and how big it will be. The cut off is mortgages that are 60 days late. Over a period of time that coud be a very big number. A range. 10-20% of their portfolio will probably default for 2 months. Call it 15% over 18 months. (would love a better guess. anyone got one?).
There is 6T in the agencies. 15% comes to .9 Trillion. Nearly as big as the Fed's QE buys.$30-50b a month? If so, that is a big nut.
So that--an estimated $0.9T in MBS buys--is why Treasury lifted the $400B cap on the F/F bailout last Christmas eve...
Interesting how the meaning of the word "market" has evolved.
+1.
Nice one, thanks
Brilliant Bruce. Does that somewhat explain why the mortgage market looks stable even though the Fed has supposedly exited the game ?