54 ms·

The Fed now owns nearly 1/3 of all U.S. mortgages

262 points by elsewhen 6y ago

nic_wilson 6y ago
In case anyone else was wondering how this might compare to "normal": >Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing. >Just before this latest round, principal payments from its mortgage bond holdings had whittled that down to 21%, but it has now increased back to 30%.
olliej 6y ago
Does the fed get the interest income from those mortgages? Because if it’s not getting 100% of that interest it’s simply bailing out speculative loans by banks. What are the rules for the fed taking on mortgages etc? I would want a max price of 80% of the value of the mortgage alongside the all proceeds portion so that banks can’t just make bad loans and then onsell them to tax payers
- deleted 6y ago
  [deleted]
- JackFr 6y ago
  Taxpayers don’t need to bail out the Fed. The Fed literally creates money ex nihilo.
  - baconandeggs 6y ago
    The Fed creates the money, but the taxpayers give it value.
  - clairity 6y ago
    > "The Fed literally creates money ex nihilo." that's too simplistic. the fed has wide latitude (probably too wide), but it should correlate with the (fuzzy, hard to accurately measure/model) productive capacity/velocity of the (globalized) economy, not just an unlimited well only constrained by inflation's devaluatory noose. moreover, considering our technological progress and trajectory, i'd love to see us revisit the idea that money can only be injected into institutions (via central banks), which was a limitation of scope imposed by the practicalities of pre-21st century life. it's also a gatekeeper's gold mine on a no longer necessary choke point. we should move towards injecting money straight into the hands that create value, not into those of middlemen like bankers.
    - JackFr 6y ago
      I don't disagree with you about the role of the Fed. But from a practical, tangible, rubber-meets-the-road, this-is-how-they-do-it point of view when the Fed buys something, it pays for it by writing a new number in my Fed account. That new number is money.
  - olliej 6y ago
    ... um, taxpayers are the fed. So any time the fed takes on a debt made by a business at anything other than a discount the fed is bailing out bad business decisions, and that means the taxpayer is paying for it. If the fed just “prints money” to cover those debts the real value of the USD collapses, and that hurts individual taxpayers more than the big businesses being bailed out.
    - Nbox9 6y ago
      The Fed provides stability around the USD market. It deploys a wide variety of polices that attempt to manage inflation, deflation, liquidity, and overall confidence in the USD. Without this stability the USD would be significantly less valuable as a medium of trade, a store of value, and as a tool for reconciling debts.
      - olliej 6y ago
        yes, but that's why it doesn't just "print money". the fed is never going to simply print money to pay off debt because that would necessarily clobber inflation and dollar value policy. I'm not sure why people are downvoting this :-/
- mrep 6y ago
  From the Federal Reserves press release in 2015: https://www.federalreserve.gov/newsevents/pressreleases/other20160111a.htm https://www.federalreserve.gov/newsevents/pressreleases/othe... The Federal Reserve Board on Monday announced preliminary results indicating that the Reserve Banks provided for payments of approximately $97.7 billion of their estimated 2015 net income to the U.S. Treasury. In addition, the Federal Reserve transferred to the Treasury $19.3 billion from Reserve Bank capital surplus on December 28, 2015, which was the amount necessary to reduce aggregate Reserve Bank surplus to the $10 billion surplus limitation in the Fixing America's Surface Transportation Act (FAST Act). The FAST Act, which was enacted on December 4, 2015, requires that aggregate Federal Reserve Bank capital surplus not exceed $10 billion. The 2015 audited Reserve Bank financial statements are expected to be published in March and may include adjustments to these preliminary unaudited results. The Federal Reserve Banks' 2015 estimated net income of $100.2 billion was derived primarily from $113.6 billion in interest income on securities acquired through open market operations (U.S. Treasury securities, federal agency and government-sponsored enterprise (GSE) mortgage-backed securities (MBS), and GSE debt securities).
alex_young 6y ago
That is interesting, but can someone explain why this is a bad thing?
- isoskeles 6y ago
  I think it would generally inflate housing prices. The Fed is a large buyer that can 'print' its own money to purchase these assets, so there isn't much incentive for it to examine the debt that its buying. It buys these mortgage bonds from banks that may also be incentivized not to scrutinize the people they're loaning money to (beyond whatever is required by law in underwriting a mortgage), because they know the Fed will purchase their debt without much question. Of course, there might be other reasons and counterarguments, this is just my interpretation.
- vermilingua 6y ago
  IANAE(conomist), but my naive interpretation is this: let’s say the pandemic causes 25% of mortgage holders to become delinquent, a number I don’t think is unreasonable. If the Fed owns a third of all mortgages (and their ownership is a normal distribution of all mortgages, I have no idea if this is true), that’s 25% of $2T that is suddenly at risk. If the total Fed balance sheet is $7T, that’s 7% of their total assets that could disappear. That seems like a lot to me.
  - renewiltord 6y ago
    Yeah but the Fed can just make 7.5% more money and we're back at even and it won't even be bad because they're trying to increase inflation not decrease it.
    - gaukes 6y ago
      The money they’re printing isn’t being circulated because people are keeping it in their bank accounts and reducing spending. I think we’re in for something when things return to normal.
      - 6y ago
remote_phone 6y ago
I just refinanced my 30-year fixed mortgage for 2.5%. The rate is utterly ridiculous now. If we get even a modicum of inflation over the next few years, I will be paying negative real interest rates.
- the-dude 6y ago
  I was paying 0.6% for the last years ( Euribor mortage ). Some people in North West Europe actually had negative rates already.
  - refurb 6y ago
    What was the term? Was it a floating rate after a lock-in period? The thing that makes 2.5% so incredible in the US, is that it's the rate for a 30 year fixed mortgage. Get one of those loan today and you'd still be paying 2.5% interest in 2049.
    - the-dude 6y ago
      Not sure what lock-in period means. This was a variable/monthly rate. So it could go even lower. Current 30 year rates in the EU are comparable to the US ones, maybe even lower.
      - MattGaiser 6y ago
        By lock in he is asking if the rate can change. In the USA, the rate is permanent.
        topspin 6y ago
        > In the USA, the rate is permanent. Variable rate mortgages exist in the US.
    - patd 6y ago
      You can get fixed 15 to 30 years mortgage rate in some European countries for less than 1% in some cases and 2% in most cases.
KingOfCoders 6y ago
Socialism is bad. I love the hypocrisy.
hn_throwaway_99 6y ago
I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?
- remote_phone 6y ago
  The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.
  - alex_young 6y ago
    Why would that happen because the fed owns a lot of mortgage debt? I don’t see the connection.
    - remote_phone 6y ago
      Entities buy UST because there’s a demand for it. It’s considered the risk-free asset, so when you have billions in cash, you park them in UST because you know you can get it back. But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well. But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake. So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies. Whether this is likely is another story.
  - JackFr 6y ago
    The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the US to buy goods from them. Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.
lvs 6y ago
There would be no inherent problem with having the Fed hold this much debt, if the tax system then soaked up distortions in how the resulting stimulus was distributed into the economy. That is, if the tax system is structured to pull back currency from unproductive sinks before it yields inflation, then there's no problem with the Fed holding that debt. A better structure, as others have pointed out, would be to have the Fed just hold the government's debt, so that allocation and taxation can both be managed by the government. At the moment, the Fed and Treasury (via Congress) are both competing to play an allocating role in the economy at the same time, with no real coordination or plan.
- baconandeggs 6y ago
  OR...you could let nature run its curse and have those debts refinanced at real interest rates that reflected the actual production in the economy, or defaulted and have those assets and resources liberated, thus correcting the distortions which were product of the FED and the government in the first place.
  - lvs 6y ago
    Well, it all depends on what you think the purpose of an economic system is. Perhaps you'd just let the mortgage market blow up, if your only concern on this Earth was to know exactly what the market price of an asset was. But you'll have to explain to me how you think the distortions are the product of Federal Reserve and government policy, since I am not following whatever you're alluding to. The distortions I see are inherent and inevitable products of the economic system we currently have, not the product of any specific policy. In fact, these distortions seem to be the product of an absence of an adequate policy to alleviate them.
- snarf21 6y ago
  You're so right. It is clear that monetary policy isn't enough. We need Congress to step in with a real plan for fiscal policy adjustments. The Fed can just do whatever they want so they do. Congress fights to get anything moving. The issue is that this asset bubble continues to grow and near zero interest rates isn't doing anything but inflating asset prices. We need fiscal policy to start growing the GDP and we need it yesterday.
JMTQp8lwXL 6y ago
I would be curious to see analysis for what home prices would be with 0 Fed intervention. Also, I don't understand how millennials aren't supposed to see this figure and immediately feel a sense of rejection, that the housing market is some form of a pyramid scheme, where you had to get in early to have a chance.
- scrumbledober 6y ago
  well as a 30 year old looking for my first home who grew up in the bay area... yeah that's exactly what I feel.
  - wyre_ 6y ago
    As a 26 year old the feels stuck working minimum wage jobs I feel the same way. Similar to the college industry as well.
  - refurb 6y ago
    Not to be snarky or obvious, but you should do what the people in the past did - find a better place to live that allows you to buy a home more easily. That's one of the reasons why there was a big migration to places like LA. Lots of jobs and cheap land to build on. To me, SF is like NYC. Unless you got in early or are one of the 1%, it's not a great place to try and build a life in (if you're looking to own a home).
    - legulere 6y ago
      Moving often means leaving friends and family behind.
      - refurb 6y ago
        There are drawbacks. But find a lower cost of living city and the savings on housing means you could probably fly back home once a month and still be ahead.
christkv 6y ago
More interesting than they owning 1/3 of the mortgages is what quality is the mortgages they own. Are they all sub prime quality? If they are is this a strategy to save banks from a default crisis in the near future without taking the systemic hit like 2007.
ars 6y ago
Can the Fed actually make money on all those mortgages?
- somebodythere 6y ago
  The Fed can make (create) money whenever it wants. That is its raison d'être.
deleted 6y ago
[deleted]
raverbashing 6y ago
On a similar note, the developments on commercial real estate loans are worrying (this has been brought up by discussions of commercial rents with unrealistic prices) https://www.reddit.com/r/nyc/comments/innhah/nearly_twothirds_of_new_york_restaurants_may_have/g4ai27m/?context=3 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...
nostromo 6y ago
The headline isn’t correct. There is $17T in US mortgage debt. The Fed has backed $2T of that via mortgage backed securities, up from $1T pre-Covid-19. That’s ~11% not 1/3. The article itself mentions this, but decided to use a misleading headline instead.
- darrenf 6y ago
  The amount expressed in dollar terms needn’t match the quantity of mortgages, so both can be true - no?
  - onion2k 6y ago
    The article states "The Fed now owns almost a third of bonds backed by home loans in the U.S." which is where the headline comes from. I think the reason why it's important is that owning 'mortgage backed debt' means you own an instrument sold by the mortgage underwriter rather than the mortgage itself. If the mortgage payer defaults and the underwriter fails you have no way of recovering the debt. A mortgage backed bond is tied to the actual property, so if the payer defaults you can sell the real estate to get the money back. That might be completely wrong though. The extend of my financial education is watching The Big Short.
    - jonahbenton 6y ago
      It is wrong, no offense. Mortgage backed debt is just a debt instrument payments from which depend on mortgage payments. It isn't debt issued by a business that has a bunch of mortgage loans on its books- those sorts of things don't exist anymore. The mortgage industry is bewilderingly complex but short version is- most loans are almost immediately sold to Fannie or Freddie, not kept on the books of those who made them. Fannie and Freddie then securitize- make bonds out of combinations of those loans- a large portion, tho not all of loans they buy. The Fed is buying a lot of those bonds, probably generally the ones backed by the most risky payers, but the analysis is extremely nuanced. That is why the Fed owns 1/3 of bonds, which (only) equate to 11% of total loan value. This prop on the market is much more powerful than 11% suggests.
- 6y ago
cryptica 6y ago
By protecting the price of real estate through mortgage purchases, the Fed is undermining the legitimacy of private property and the concept of private ownership. This is not going to end well.
natcombs 6y ago
>> Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing. 8x increase over QE is crazy. Is that 8x mortgage bonds or 8x bonds in general?
- mrep 6y ago
  US treasuries mostly in late march. Demand for dollars skyrocketed due to covid-19 and people were selling their treasuries to get dollars causing treasury yields to spike so the FED started buying $75 billion in Treasury securities per day to supply liquidity to the Treasury market and ended up buying over $1 trillion in Treasury securities within a short 3-week window. More analysis about it at https://www.lynalden.com/august-2020-newsletter/ https://www.lynalden.com/august-2020-newsletter/
b34r 6y ago
Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country? (Assuming the acquisition process isn’t slow AF because government.) Real estate seems like a pretty important part of the economy and, more importantly, the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies.
- mrfusion 6y ago
  It didn’t go so well with college loans. Any market government gets into gets distorted.
  - ceejayoz 6y ago
    Most of the rest of the developed world doesn't really consider college a market in the American fashion, though. Half-hearted government is a problem; education and healthcare both suffer in the US from trying to split the baby Solomon-style.
  - charlesu 6y ago
    Maybe higher education shouldn't be a market.
- qeternity 6y ago
  > Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country? > Real estate seems like a pretty important part of the economy... You just answered your own question. Governments do not have a history of distributing scarce resources effectively. You need various market forces. > the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies This is not what happens. As you said - it's artificial. Markets, like the internet, route around this sort of censorship. Any attempt to make housing artificially more affordable will have the effect of increasing demand (by design). When you increase demand, prices rise. And thus becomes unaffordable again. You can then increase the subsidies further to try to offset your original manipulation, which will only worsen the problem. This is precisely what happened in the 90s/early 00s and the result was the 2008 housing bubble.
mgh2 6y ago
This is actually a good trend. Just compare this to the alternative. San Francisco and Seattle, where the tech elite overprice the non-tech population, decimating local communities and worsening the homeless problem. Vancouver and Irvine, where Chinese elite launder money to buy real state as investments (and leave them empty) rather than living spaces, resulting in the same problem. This all might be a silver lining of the pandemic: combined with remote work, people are no longer confined to one place - avoiding discrimination of all sorts (from real state to immigration). The truth is that if the rich are left unchecked, greed can run rampant and create more harm than good- ex: healthcare, stock bubbles.
- deleted 6y ago
  [deleted]
HashThis 6y ago
The way crony capitalism theft works is to look for a way to steal. The way to steal is now clear. Manufacture blow-up mortgages and they blow up on the mortgage buyers (Fed). S&L 1980s bailouts were an exact copy of 2008 Mortgage bailouts. Theft in creating mass blow-up real estate loans. This is a proven crony capitalism way to steal. When the Fed has to politically buy them, then crony capitalists will find a way to get them buying blow-up mortgages in 5 or 10 years.
mcculley 6y ago
When I was a boy my elders told me that we had to win the Cold War or we would end up with the government owning everything.
- tengbretson 6y ago
  Well the federal reserve isn't part of the government, so hurray for us I guess.
  - havetocharge 6y ago
    Wikipedia says that it's under the jurisdiction of the Federal government of the United States. So maybe depends on how you define 'government'? https://en.m.wikipedia.org/wiki/Federal_Reserve https://en.m.wikipedia.org/wiki/Federal_Reserve
    - dmurray 6y ago
      Maybe it depends how you define "under the jurisdiction". Every citizen and corporation in the US is subject to the government's jurisdiction.
    - thoughtstheseus 6y ago
      If only there was a consolidated federal balance sheet.
    - WealthVsSurvive 6y ago
      Yes, the government absolutely controls the Federal reserve, but likes to keep it out of "politics," which is code for "please don't talk about what we're doing here, it could be used to spook the cattle."
  - mcculley 6y ago
    I guess we need another word for a monopoly central bank defined by federal law that controls the value of our resources.
coronadisaster 6y ago
The homes around here (suburb) fly off the shelves even if prices are higher then the last bubble (~2007)... not sure what is going on. Could people be moving away from large cities because of covid-19 and remote work opportunities?
SilasX 6y ago
@dang should probably link to the main Bloomberg story rather than a shorter, opinionated site/blog: https://www.bloomberg.com/news/articles/2020-09-01/fed-s-mortgage-buying-spree-at-1-trillion-with-no-end-in-sight https://www.bloomberg.com/news/articles/2020-09-01/fed-s-mor...
felipe_ii 6y ago
I don't understand what is being used as the denominator to generate this 1/3 number in the headline. A quick search shows that the US MBS market is about $10.3 trillion in size [1] - the actual mortgage market is larger (what nostromo mentioned earlier). Putting some recent numbers [2] over the size of the MBS market would show that the Fed owns a little less than a 1/5 of all US MBS. Also, he mentions that the Fed has been purchasing roughly $100 billion per month in MBS securities since April, but this leaves out the fact that a non-insignificant number of MBS in their holdings are either i) reaching maturity, or ii) being prepaid. The second issue is more prevalent now - with the low-rate environment that exists in the US many people are refinancing their mortgages to take advantage of lower rates, but in any case it isn't uncommon for mortgages to be paid off before their maturity date. I don't know what the net figures are, but what I'm trying to say is that purchases of MBS != growth of MBS holdings. I seriously think this author has somehow conflated the size of the SOMA assets with the size of the MBS market - continuing growth of MBS at $100 billion for the rest of the year, leaving all else equal, will give us about $2.4 trillion of MBS over a denominator of $7.4 trillion - which would give us about 1/3. [1]: https://www.sifma.org/resources/research/fixed-income-chart/ https://www.sifma.org/resources/research/fixed-income-chart/ [2]: https://www.federalreserve.gov/releases/h41/current/ https://www.federalreserve.gov/releases/h41/current/
1DRACOSEA8 6y ago
It can be a good investment, I certainly have done it and did it for almost a decade. I bought properties cash, the first purchase was (with half of my parents) money in Miami 2007. I made 50% in less than four years and continued doing that in California, until 2018 and I at the moment no longer own property. Home is ok, but if you’re not paying cash for it, is it really yours? And while yours outright you’re on the hook for annual taxes; good luck in Austin with that
_nalply 6y ago
Maybe some people have discovered a money perpetuum mobile: A bank creates mortgages inflating the collateral then sells them to the Fed. The bank walks away with a surplus and the Fed explains that they are saving the economy by bailing out the bank.
mensetmanusman 6y ago
We need massive govt. investment in modular housing manufacturing research with a standards consortium so that homes can click together with utilities :)

262 points by elsewhen 6y ago

In case anyone else was wondering how this might compare to "normal": >Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing. >Just before this latest round, principal payments from its mortgage bond holdings had whittled that down to 21%, but it has now increased back to 30%.

olliej 6y ago

Does the fed get the interest income from those mortgages? Because if it’s not getting 100% of that interest it’s simply bailing out speculative loans by banks. What are the rules for the fed taking on mortgages etc? I would want a max price of 80% of the value of the mortgage alongside the all proceeds portion so that banks can’t just make bad loans and then onsell them to tax payers

deleted 6y ago
[deleted]
JackFr 6y ago
Taxpayers don’t need to bail out the Fed. The Fed literally creates money ex nihilo.
- baconandeggs 6y ago
  The Fed creates the money, but the taxpayers give it value.
- clairity 6y ago
  > "The Fed literally creates money ex nihilo." that's too simplistic. the fed has wide latitude (probably too wide), but it should correlate with the (fuzzy, hard to accurately measure/model) productive capacity/velocity of the (globalized) economy, not just an unlimited well only constrained by inflation's devaluatory noose. moreover, considering our technological progress and trajectory, i'd love to see us revisit the idea that money can only be injected into institutions (via central banks), which was a limitation of scope imposed by the practicalities of pre-21st century life. it's also a gatekeeper's gold mine on a no longer necessary choke point. we should move towards injecting money straight into the hands that create value, not into those of middlemen like bankers.
  - JackFr 6y ago
    I don't disagree with you about the role of the Fed. But from a practical, tangible, rubber-meets-the-road, this-is-how-they-do-it point of view when the Fed buys something, it pays for it by writing a new number in my Fed account. That new number is money.
- olliej 6y ago
  ... um, taxpayers are the fed. So any time the fed takes on a debt made by a business at anything other than a discount the fed is bailing out bad business decisions, and that means the taxpayer is paying for it. If the fed just “prints money” to cover those debts the real value of the USD collapses, and that hurts individual taxpayers more than the big businesses being bailed out.
  - Nbox9 6y ago
    The Fed provides stability around the USD market. It deploys a wide variety of polices that attempt to manage inflation, deflation, liquidity, and overall confidence in the USD. Without this stability the USD would be significantly less valuable as a medium of trade, a store of value, and as a tool for reconciling debts.
    - olliej 6y ago
      yes, but that's why it doesn't just "print money". the fed is never going to simply print money to pay off debt because that would necessarily clobber inflation and dollar value policy. I'm not sure why people are downvoting this :-/
mrep 6y ago
From the Federal Reserves press release in 2015: https://www.federalreserve.gov/newsevents/pressreleases/other20160111a.htm https://www.federalreserve.gov/newsevents/pressreleases/othe... The Federal Reserve Board on Monday announced preliminary results indicating that the Reserve Banks provided for payments of approximately $97.7 billion of their estimated 2015 net income to the U.S. Treasury. In addition, the Federal Reserve transferred to the Treasury $19.3 billion from Reserve Bank capital surplus on December 28, 2015, which was the amount necessary to reduce aggregate Reserve Bank surplus to the $10 billion surplus limitation in the Fixing America's Surface Transportation Act (FAST Act). The FAST Act, which was enacted on December 4, 2015, requires that aggregate Federal Reserve Bank capital surplus not exceed $10 billion. The 2015 audited Reserve Bank financial statements are expected to be published in March and may include adjustments to these preliminary unaudited results. The Federal Reserve Banks' 2015 estimated net income of $100.2 billion was derived primarily from $113.6 billion in interest income on securities acquired through open market operations (U.S. Treasury securities, federal agency and government-sponsored enterprise (GSE) mortgage-backed securities (MBS), and GSE debt securities).

alex_young 6y ago

That is interesting, but can someone explain why this is a bad thing?

isoskeles 6y ago
I think it would generally inflate housing prices. The Fed is a large buyer that can 'print' its own money to purchase these assets, so there isn't much incentive for it to examine the debt that its buying. It buys these mortgage bonds from banks that may also be incentivized not to scrutinize the people they're loaning money to (beyond whatever is required by law in underwriting a mortgage), because they know the Fed will purchase their debt without much question. Of course, there might be other reasons and counterarguments, this is just my interpretation.
vermilingua 6y ago
IANAE(conomist), but my naive interpretation is this: let’s say the pandemic causes 25% of mortgage holders to become delinquent, a number I don’t think is unreasonable. If the Fed owns a third of all mortgages (and their ownership is a normal distribution of all mortgages, I have no idea if this is true), that’s 25% of $2T that is suddenly at risk. If the total Fed balance sheet is $7T, that’s 7% of their total assets that could disappear. That seems like a lot to me.
- renewiltord 6y ago
  Yeah but the Fed can just make 7.5% more money and we're back at even and it won't even be bad because they're trying to increase inflation not decrease it.
  - gaukes 6y ago
    The money they’re printing isn’t being circulated because people are keeping it in their bank accounts and reducing spending. I think we’re in for something when things return to normal.
    - 6y ago

remote_phone 6y ago

I just refinanced my 30-year fixed mortgage for 2.5%. The rate is utterly ridiculous now. If we get even a modicum of inflation over the next few years, I will be paying negative real interest rates.

the-dude 6y ago
I was paying 0.6% for the last years ( Euribor mortage ). Some people in North West Europe actually had negative rates already.
- refurb 6y ago
  What was the term? Was it a floating rate after a lock-in period? The thing that makes 2.5% so incredible in the US, is that it's the rate for a 30 year fixed mortgage. Get one of those loan today and you'd still be paying 2.5% interest in 2049.
  - the-dude 6y ago
    Not sure what lock-in period means. This was a variable/monthly rate. So it could go even lower. Current 30 year rates in the EU are comparable to the US ones, maybe even lower.
    - MattGaiser 6y ago
      By lock in he is asking if the rate can change. In the USA, the rate is permanent.
      - topspin 6y ago
        > In the USA, the rate is permanent. Variable rate mortgages exist in the US.
  - patd 6y ago
    You can get fixed 15 to 30 years mortgage rate in some European countries for less than 1% in some cases and 2% in most cases.

KingOfCoders 6y ago

Socialism is bad. I love the hypocrisy.

hn_throwaway_99 6y ago

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

remote_phone 6y ago
The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.
- alex_young 6y ago
  Why would that happen because the fed owns a lot of mortgage debt? I don’t see the connection.
  - remote_phone 6y ago
    Entities buy UST because there’s a demand for it. It’s considered the risk-free asset, so when you have billions in cash, you park them in UST because you know you can get it back. But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well. But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake. So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies. Whether this is likely is another story.
- JackFr 6y ago
  The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the US to buy goods from them. Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.

lvs 6y ago

There would be no inherent problem with having the Fed hold this much debt, if the tax system then soaked up distortions in how the resulting stimulus was distributed into the economy. That is, if the tax system is structured to pull back currency from unproductive sinks before it yields inflation, then there's no problem with the Fed holding that debt. A better structure, as others have pointed out, would be to have the Fed just hold the government's debt, so that allocation and taxation can both be managed by the government. At the moment, the Fed and Treasury (via Congress) are both competing to play an allocating role in the economy at the same time, with no real coordination or plan.

baconandeggs 6y ago
OR...you could let nature run its curse and have those debts refinanced at real interest rates that reflected the actual production in the economy, or defaulted and have those assets and resources liberated, thus correcting the distortions which were product of the FED and the government in the first place.
- lvs 6y ago
  Well, it all depends on what you think the purpose of an economic system is. Perhaps you'd just let the mortgage market blow up, if your only concern on this Earth was to know exactly what the market price of an asset was. But you'll have to explain to me how you think the distortions are the product of Federal Reserve and government policy, since I am not following whatever you're alluding to. The distortions I see are inherent and inevitable products of the economic system we currently have, not the product of any specific policy. In fact, these distortions seem to be the product of an absence of an adequate policy to alleviate them.
snarf21 6y ago
You're so right. It is clear that monetary policy isn't enough. We need Congress to step in with a real plan for fiscal policy adjustments. The Fed can just do whatever they want so they do. Congress fights to get anything moving. The issue is that this asset bubble continues to grow and near zero interest rates isn't doing anything but inflating asset prices. We need fiscal policy to start growing the GDP and we need it yesterday.

JMTQp8lwXL 6y ago

I would be curious to see analysis for what home prices would be with 0 Fed intervention. Also, I don't understand how millennials aren't supposed to see this figure and immediately feel a sense of rejection, that the housing market is some form of a pyramid scheme, where you had to get in early to have a chance.

scrumbledober 6y ago
well as a 30 year old looking for my first home who grew up in the bay area... yeah that's exactly what I feel.
- wyre_ 6y ago
  As a 26 year old the feels stuck working minimum wage jobs I feel the same way. Similar to the college industry as well.
- refurb 6y ago
  Not to be snarky or obvious, but you should do what the people in the past did - find a better place to live that allows you to buy a home more easily. That's one of the reasons why there was a big migration to places like LA. Lots of jobs and cheap land to build on. To me, SF is like NYC. Unless you got in early or are one of the 1%, it's not a great place to try and build a life in (if you're looking to own a home).
  - legulere 6y ago
    Moving often means leaving friends and family behind.
    - refurb 6y ago
      There are drawbacks. But find a lower cost of living city and the savings on housing means you could probably fly back home once a month and still be ahead.

christkv 6y ago

More interesting than they owning 1/3 of the mortgages is what quality is the mortgages they own. Are they all sub prime quality? If they are is this a strategy to save banks from a default crisis in the near future without taking the systemic hit like 2007.

ars 6y ago

Can the Fed actually make money on all those mortgages?

somebodythere 6y ago
The Fed can make (create) money whenever it wants. That is its raison d'être.

deleted 6y ago

[deleted]

raverbashing 6y ago

On a similar note, the developments on commercial real estate loans are worrying (this has been brought up by discussions of commercial rents with unrealistic prices) https://www.reddit.com/r/nyc/comments/innhah/nearly_twothirds_of_new_york_restaurants_may_have/g4ai27m/?context=3 https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...

nostromo 6y ago

The headline isn’t correct. There is $17T in US mortgage debt. The Fed has backed $2T of that via mortgage backed securities, up from $1T pre-Covid-19. That’s ~11% not 1/3. The article itself mentions this, but decided to use a misleading headline instead.

darrenf 6y ago
The amount expressed in dollar terms needn’t match the quantity of mortgages, so both can be true - no?
- onion2k 6y ago
  The article states "The Fed now owns almost a third of bonds backed by home loans in the U.S." which is where the headline comes from. I think the reason why it's important is that owning 'mortgage backed debt' means you own an instrument sold by the mortgage underwriter rather than the mortgage itself. If the mortgage payer defaults and the underwriter fails you have no way of recovering the debt. A mortgage backed bond is tied to the actual property, so if the payer defaults you can sell the real estate to get the money back. That might be completely wrong though. The extend of my financial education is watching The Big Short.
  - jonahbenton 6y ago
    It is wrong, no offense. Mortgage backed debt is just a debt instrument payments from which depend on mortgage payments. It isn't debt issued by a business that has a bunch of mortgage loans on its books- those sorts of things don't exist anymore. The mortgage industry is bewilderingly complex but short version is- most loans are almost immediately sold to Fannie or Freddie, not kept on the books of those who made them. Fannie and Freddie then securitize- make bonds out of combinations of those loans- a large portion, tho not all of loans they buy. The Fed is buying a lot of those bonds, probably generally the ones backed by the most risky payers, but the analysis is extremely nuanced. That is why the Fed owns 1/3 of bonds, which (only) equate to 11% of total loan value. This prop on the market is much more powerful than 11% suggests.
6y ago

cryptica 6y ago

By protecting the price of real estate through mortgage purchases, the Fed is undermining the legitimacy of private property and the concept of private ownership. This is not going to end well.

natcombs 6y ago

>> Morgan Stanley analysts pointed out in late March that the buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing. 8x increase over QE is crazy. Is that 8x mortgage bonds or 8x bonds in general?

mrep 6y ago
US treasuries mostly in late march. Demand for dollars skyrocketed due to covid-19 and people were selling their treasuries to get dollars causing treasury yields to spike so the FED started buying $75 billion in Treasury securities per day to supply liquidity to the Treasury market and ended up buying over $1 trillion in Treasury securities within a short 3-week window. More analysis about it at https://www.lynalden.com/august-2020-newsletter/ https://www.lynalden.com/august-2020-newsletter/

b34r 6y ago

Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country? (Assuming the acquisition process isn’t slow AF because government.) Real estate seems like a pretty important part of the economy and, more importantly, the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies.

mrfusion 6y ago
It didn’t go so well with college loans. Any market government gets into gets distorted.
- ceejayoz 6y ago
  Most of the rest of the developed world doesn't really consider college a market in the American fashion, though. Half-hearted government is a problem; education and healthcare both suffer in the US from trying to split the baby Solomon-style.
- charlesu 6y ago
  Maybe higher education shouldn't be a market.
qeternity 6y ago
> Out of curiosity, why wouldn’t we want the government managing mortgages for the whole country? > Real estate seems like a pretty important part of the economy... You just answered your own question. Governments do not have a history of distributing scarce resources effectively. You need various market forces. > the government artificially making housing more accessible for potential first time buyers creates a virtuous cycle where people can finally save money and the eventually spend that money to stimulate their micro economies This is not what happens. As you said - it's artificial. Markets, like the internet, route around this sort of censorship. Any attempt to make housing artificially more affordable will have the effect of increasing demand (by design). When you increase demand, prices rise. And thus becomes unaffordable again. You can then increase the subsidies further to try to offset your original manipulation, which will only worsen the problem. This is precisely what happened in the 90s/early 00s and the result was the 2008 housing bubble.

mgh2 6y ago

This is actually a good trend. Just compare this to the alternative. San Francisco and Seattle, where the tech elite overprice the non-tech population, decimating local communities and worsening the homeless problem. Vancouver and Irvine, where Chinese elite launder money to buy real state as investments (and leave them empty) rather than living spaces, resulting in the same problem. This all might be a silver lining of the pandemic: combined with remote work, people are no longer confined to one place - avoiding discrimination of all sorts (from real state to immigration). The truth is that if the rich are left unchecked, greed can run rampant and create more harm than good- ex: healthcare, stock bubbles.

deleted 6y ago
[deleted]

HashThis 6y ago

The way crony capitalism theft works is to look for a way to steal. The way to steal is now clear. Manufacture blow-up mortgages and they blow up on the mortgage buyers (Fed). S&L 1980s bailouts were an exact copy of 2008 Mortgage bailouts. Theft in creating mass blow-up real estate loans. This is a proven crony capitalism way to steal. When the Fed has to politically buy them, then crony capitalists will find a way to get them buying blow-up mortgages in 5 or 10 years.

mcculley 6y ago

When I was a boy my elders told me that we had to win the Cold War or we would end up with the government owning everything.

tengbretson 6y ago
Well the federal reserve isn't part of the government, so hurray for us I guess.
- havetocharge 6y ago
  Wikipedia says that it's under the jurisdiction of the Federal government of the United States. So maybe depends on how you define 'government'? https://en.m.wikipedia.org/wiki/Federal_Reserve https://en.m.wikipedia.org/wiki/Federal_Reserve
  - dmurray 6y ago
    Maybe it depends how you define "under the jurisdiction". Every citizen and corporation in the US is subject to the government's jurisdiction.
  - thoughtstheseus 6y ago
    If only there was a consolidated federal balance sheet.
  - WealthVsSurvive 6y ago
    Yes, the government absolutely controls the Federal reserve, but likes to keep it out of "politics," which is code for "please don't talk about what we're doing here, it could be used to spook the cattle."
- mcculley 6y ago
  I guess we need another word for a monopoly central bank defined by federal law that controls the value of our resources.

coronadisaster 6y ago

The homes around here (suburb) fly off the shelves even if prices are higher then the last bubble (~2007)... not sure what is going on. Could people be moving away from large cities because of covid-19 and remote work opportunities?

SilasX 6y ago

@dang should probably link to the main Bloomberg story rather than a shorter, opinionated site/blog: https://www.bloomberg.com/news/articles/2020-09-01/fed-s-mortgage-buying-spree-at-1-trillion-with-no-end-in-sight https://www.bloomberg.com/news/articles/2020-09-01/fed-s-mor...

felipe_ii 6y ago

I don't understand what is being used as the denominator to generate this 1/3 number in the headline. A quick search shows that the US MBS market is about $10.3 trillion in size [1] - the actual mortgage market is larger (what nostromo mentioned earlier). Putting some recent numbers [2] over the size of the MBS market would show that the Fed owns a little less than a 1/5 of all US MBS. Also, he mentions that the Fed has been purchasing roughly $100 billion per month in MBS securities since April, but this leaves out the fact that a non-insignificant number of MBS in their holdings are either i) reaching maturity, or ii) being prepaid. The second issue is more prevalent now - with the low-rate environment that exists in the US many people are refinancing their mortgages to take advantage of lower rates, but in any case it isn't uncommon for mortgages to be paid off before their maturity date. I don't know what the net figures are, but what I'm trying to say is that purchases of MBS != growth of MBS holdings. I seriously think this author has somehow conflated the size of the SOMA assets with the size of the MBS market - continuing growth of MBS at $100 billion for the rest of the year, leaving all else equal, will give us about $2.4 trillion of MBS over a denominator of $7.4 trillion - which would give us about 1/3. [1]: https://www.sifma.org/resources/research/fixed-income-chart/ https://www.sifma.org/resources/research/fixed-income-chart/ [2]: https://www.federalreserve.gov/releases/h41/current/ https://www.federalreserve.gov/releases/h41/current/

1DRACOSEA8 6y ago

It can be a good investment, I certainly have done it and did it for almost a decade. I bought properties cash, the first purchase was (with half of my parents) money in Miami 2007. I made 50% in less than four years and continued doing that in California, until 2018 and I at the moment no longer own property. Home is ok, but if you’re not paying cash for it, is it really yours? And while yours outright you’re on the hook for annual taxes; good luck in Austin with that

_nalply 6y ago

Maybe some people have discovered a money perpetuum mobile: A bank creates mortgages inflating the collateral then sells them to the Fed. The bank walks away with a surplus and the Fed explains that they are saving the economy by bailing out the bank.

mensetmanusman 6y ago

We need massive govt. investment in modular housing manufacturing research with a standards consortium so that homes can click together with utilities :)