By the end of March, the U.S. plans to complete its purchase of $1.25 trillion in mortgage backed securities (MBS). Hopefully, they’ll start slowly selling those securities this year, in an effort to increase liquidity and decrease their balance sheet, which is currently in excess of $2 trillion.
James Bullard, the current president of the Federal Reserve Bank of St. Louis is recommending that the U.S. Central Bank starts offloading some of its mortgage backed securities near the end of 2010. Philadelphia Fed President Charles Plosser is recommending the same thing stating “As the economic recovery gains strength and monetary policy begins to normalize, I would favor our beginning to sell some of the agency mortgage backed securities from our portfolio rather than relying only on redemptions of these assets,”. Nobody’s recommending a total sell off, just an initial reduction to test the waters and see what the market can soak up.
The two recommendations are meeting stern opposition due to the volatility of the housing market. Opponents are saying that the sale of these mortgage backed securities by the Central Bank could spur an increase in mortgage rates. Mr. Bullard revealed in a press conference on February 8th that he believed that if the sale of these mortgage backed securities took place before the feds raised short term interest rates, no spike would be realized. He went on to say the sequence of the gradual selling of the securities was the key.
True stabilization in housing is going to take time – low interest rates and government programs are, at least in my opinion, prolonging a recovery; worst case, these programs are making it hard to see where we really stand. At its current state, any large scale maneuvers could cause a chain reaction sending the market into a downward free fall once again. Billions of tax payer dollars have been spent by the Obama administration in an attempt to regain control of the housing market, an uncontrolled sell off is the last thing anyone wants, and it’s certainly the last thing the market needs.
However, starting to sell mortgage backed securities could help us determine the market’s strength and investor confidence.
Sources:
Fed should sell mortgage-backed bonds, Plosser says
Fed’s Bullard Talks of Mortgage-Asset Sales
Image Credit: The Fed’s Balance Sheet: 11-Months Later
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It seems as though we are a long way off a full recovery from this economic downturn. We really need to be careful before we turn off the economic stimuli that have helped the recovery so far. Debt levels are high for sure, but is the market sufficiently strong to continue economic growth without this help?
This is a complicated and scary slope to begin diving into with the market the way it is today. Mortgage rates are definitely going to go up once they stop buying the securities, I just hope they don’t sky rocket. The government definitely needs to get out of the market and let it correct itself.
I can echo what @Moriara has added… The downturn does not seem to have reached its low point and stimulus packages need to be carefully considered. Thanks for the post.
Sadly, I think the stimulus is only masking the underlying problem (overpriced homes bought by people who couldn’t truly afford them), which will inevitably come to rear its ugly head. Sooner or later, the house of cards will come falling down.
They must wait one year more, before they even starting talking about it, the finance market has still a long way to go before its stability.
Rates will likely go up, at the end of March since the Fed will no longer be purchasing Mortgage Backed Securities. The question remains by how much, and how much it will affect the real estate sales numbers. If it is drastic, then they will probably delay the sale of the mortgage backed securities they own, and focus on ways to stimulate the housing market. At least we can hope.
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I agree with @sundream
It is too early to see a major turnaround in the economy. Hopefully I am wrong.
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