Sunday, October 28, 2012

Happy MBS Day

Today is the last day of the first quarter, but more importantly, it’s the last day that the Federal Reserve is buying mortgage-backed securities from Freddie (FRE) and Fannie (FNM). The Fed has spent $1.25 trillion on buying this garbage from the GSEs but after today, no more!

It turns out that when you dump huge, gigantic amounts of money at something there tends to be an effect. In this case, mortgage rates have remained very low. Now some people worry that without Ben buying up anything that moves mortgage rates will soar. I doubt that will happen. Sure, rates will probably creep up (a 30-year fixed is around 5% right now) but the market knew this day was coming and it’s had some time to adjust. Also, the Fed still has the ability to jump back in if things quickly head south.

So who will now buy mortgage-backed securities? One answer is that banks, of all people, might do it with all the cash that the Fed has recently injected. Plus, even though the official Fed is going away, its shadow will still be around in the move of Fannie and Freddie buying out delinquent loans. This will be a lot of cash in investors’ hands.

Some people are worried that higher mortgages rates will ruin any gains made by a still-weak housing market, and we might go back exactly where we were. Once again, I’m a doubter. The mortgage market is much healthier that it was. Mortgage spreads have plunged from 18 months ago. For now, it looks like private investors are ready to take the place of the Fed in the mortgage market.

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