The June Federal Reserve Quarterly
Mortgages Outstanding report contains some interesting information.
I’m not quite sure what to make of it.
Consider these two slides from the June report on 1st Q mortgage outstandings.
The Federal Reserve has reclassified $4.4 trillion of IOU’s. They have taken them out of the category “Mortgage Pools and Trusts” and put them on the individual Agency’s balance sheet(s).
Now consider the March 2010 reports from both Fannie and Freddie. They don’t show the shift in assets from “Guaranteed” to “On the books”.
Some thoughts on this.
-This is not a small matter. $4.4 trillion of bookkeeping is involved. This is more than 40% of all individual mortgages. This is a major reclassification.
-In this case I would side with the Fed. All of these dubious assets should be on someone’s balance sheet. But I am stumped as to why the Fed did this without FHFA adjusting its book too.
-The Fed thinks this should be on the Agency’s balance sheets. We all know that Treasury owns the GSEs at this point. That being the case shouldn’t the debts of the Agencies be on the Federal balance sheet? This would put us $3T or so over the debt limit and bankrupt the government on paper. I find it odd that the Fed is pushing this at this time. It works against them.
-This is just an accounting adjustment. But these things do matter. The terms of the Conservatorship require that the GSEs keep their balance sheets below $900 billion. So this accounting adjustment would throw the legal status of the GSEs into question. They would be in material covenant default on the Senior Preferred (Treasury Basura Preff) if this adjustment takes place. Given that all of the other securities of the Agencies are “cross defaulted” this raises the question as to the legal status of all of the publicly traded debt securities of the Agencies. I know Washington did not mean that to happen. But then again, stuff does tend to happen.
-The Fed owns $1.2 Trillion of the former “Trust Securities”. Maybe the Fed feels better knowing that these are direct obligations of the GSE’s. I am not sure that makes them more collectible. But in a bankruptcy a senior claim will have a better chance than a subordinated guaranty. In that sense the reclassification puts the Fed in a better creditor position. But really this is all the same pocket, so why would that matter?
-I don’t think that the Fed makes $4 trillion changes in accounting without substantial internal discussion as to the implications. Therefore this is quite deliberate and we should not ignore the significance of it. I’m still wondering what the significance is. I’ll ask the Fed and the FHFA. If they respond, I'll let you know.