As we saw yesterday the Fed had never bought these confections, what one observer has called "dog crap in a cat crap wrapper" until the Great Financial Crisis
Maybe confection is the wrong word.
However, during the GFC the market for bundled mortgages stopped functioning, no one trusted the quality of the mortgages inside the wrappers, what with their various tranches and flavors and ratings shenanigans.
So the Fed stepped in and started buying in size, so much so that when presented on a semi-log chart it is a graphical representation of madness:
Ben Bernanke was Chairman of the Fed from February 1, 2006 to January 31, 2014.
Janet Yellen was Chair from February 3, 2014 to February 3, 2018.
It is on them that, after the initial emergency, the assets stayed on the balance sheet and distorted the housing finance market beyond recognition.
It is on them that mortgage interest rates were so low as to cause another housing bubble, driving house prices to levels at least double what they would otherwise be, probably more than double, and condemning generations to being nothing more than tenants with no chance whatsoever of stepping on the first rung of wealth accumulation.
And because the Fed owns so much agency MBS paper it doesn't dare sell into the market for fear of crashing the MBS market and jacking interest rates to ridiculous levels.
So the Fed announced on May 4, 2022 they would reduce the size of the MBS holdings by letting them run-off. There are three ways that existing mortgages are, in effect canceled, so they can be allowed to run off:
1) they are paid off by the homeowner.
2) they are replaced by new mortgages upon the sale of the property.
3) they are replaced by refinancing.
There has been much discussion of the fact that refi's plummet in a rising rate environment, the homeowner keeps their current mortgage.
We are about to see the second source of roll-off available mortgages shrink dramatically as affordability issues force potential home buyers to stop bidding house prices higher and the volume of transactions grinds down.
Then the first source of paper available for roll-off, pay-offs, becomes suspect in the face of recession with its concomitant rise in delinquencies and defaults.
The fact that Saints Bernanke and Yellen not only didn't shrink the position but, as of the last H.4.1 report from Mr. Powell's Fed, allowed it to get to $2.727 trillion, more than triple the 2013 level, is just mind-boggling.
More tomorrow, some possible resolutions of this disaster, none very appealing.
In the meantime I keep referring back to this Bloomberg Opinion piece, August 11:
Fed Purchases Of Mortgage Backed Securities Have Destroyed The Housing Market
And this from Barron's, August 7:
"The Fed Is About to Ramp Up Balance-Sheet Shrinkage. It May Get Dicey"
Finally, if interested, a search of the blog with the keyword: H.4.1
