This is posted pursuant to the comment thread at EPJ Central, for Fed Blinks; Will Resume Money Printing. Robert Wenzel commented to me as follows:
@BobEnglish
It's true that the amount of money the Fed will pump in via this method is likely not terribly sizable, but the actual amount is unknowable. It depends on how many of those 30 year and 15 year mortgages experience pre-pays. Plus, although they are identified as 30 year and 15 year product that would be the maturity at issue, not currently.
It is likely they mostly contain mortgages between 2000 and, say, 2007, so there is probaly some time (but not 15 or 30 years) before big waves hit, but given the current low level in rates, you would think any good paper is being refinanced, if terms allow that to be done.
Well, I did some digging and found that the talk is focusing on prepayments and redemptions--not the scheduled coupon payments that I was talking about. It's possible the Fed will reinvest all three, but now it's becoming clear what's going on.
Look at the below (click through for larger image):
This was created by parsing the Detail worksheet of the Fed's MBS Excel file. It's evident that the bulk of maturities are between 2039 and mid-2040--meaning the bulk of the mortgages the Fed bought were issued from 2009 through mid-2010--not a terribly prosperous period in the last decade.
Those borrowers in the pools the Fed bought who qualify at the currently lower rates will very likely refinance, but my guess is the Fed bought some pretty bad paper. Prepayments won't be as big a factor as actual redemptions when Freddie/Fannie pay the Fed for defaulted securities (through its now unlimited line of credit to the Treasury). This may also include any shortfalls created through loan-mods that are rumored to be coming.
Got that? Homeowners default on mortgages that the Fed bought through MBS securities. Fannie/Feddie pay the Fed for the defaulted MBS securities by borrowing from the Treasury. Fed uses proceeds to buy more Treasurys in an amount to offset the Fannie/Feddie borrowings. Reserve neutral--the FedWire circle (jerk) is complete.
Bob,
ReplyDeleteRemember this was a clean up operation. I don't think the Fed bought any MBS with a 2010 origination year. And I doubt few MBS were bought by the Fed that were originally issued in'09. The market was under by this point. The Fed was buying earlier issued paper that was underwater to bailout the banks.
If the Fed did buy paper originally issued in 2010, this is new news that indicates some new hanky panky.
BTW Your overall analysis seems to be accurate: Fannie/Freddie money to Fed ---Fannie/Freddie raises needed money from Treasury. Fed provides Treasury the money by buying securiries from Treasury that money is given to Fannie/Freddie which gives it to the Fed.
ReplyDeleteVery confusing. Bob or Robert- So how does the Fed actually get payment. I understand the pre-payment. Someone pays off mortgage and Fannie gets the money and they send that money to Fed.
ReplyDeleteOn the redemption/default side, a homeowner defaults on a mortgage, where does the money come from? I think you are saying that Fannie doesn't have any money and technically has to borrow from the Treasury, but as far as the function of how this would work if they did have postive cash flow....
are you saying they foreclose on the the physical house, and send the money to the Fed? That is the "redemption?"