Feb232013
The Federal Reserve owns 10% of all residental mortgage debt, increasing 5% per year
The Federal Reserve (US central bank) influences interest rates and by extension mortgages rates. One of their key tools is the buy or selling of bonds, it adds or subtracts money from the money supply . Since 2008 and the Federal Reserve has purchased over $1 trillion dollars worth of US residential mortgages in the form of bonds. The effect of this unprecedented mortgage bond purchasing pushed mortgage rates down to the lowest levels since the 1940’s. This $1 trillion dollar figure represents 10% of the of the outstanding residential mortgages in the US.
To explain it in another way, if you have a residential mortgage there is a 10% chance that it’s owned by the Federal Reserve. This is an incredible infusion of cash into the mortgage system. If fact, its one of the reason why banks don’t pay interest on cash deposits. Banks can get cash through the Federal Reserve with overnight loans and mortgage purchases.
What is even more incredible is that through the Quantitative Easing Program (money creation) the Federal Reserve is purchasing $45 billion of mortgage bonds each month. This is about $540 billion of mortgage per year or of 5% of the existing resident mortgage debt. Since this program is expected to last several years (to suppress the mortgage rates) by the end of 2015 the Federal Reserve will 25% of the existing residential mortgages.
Normally, mortgage bonds were purchased by banks, insurance companies, hedge funds, pensions and mutual funds. Now the total mortgage pool/debt is slowly and incrementally purchased by the federal reserve. There is one question I ask myself:
What will be the end game and what will the affect the on the mortgage market?
The problem is how do you sell the assets without greatly increasing the mortgages rates? Sooner or later the Fed will have to sell these assets and when they do it will create a problem they originally wanted to avoid. When all these mortgage bonds hit the market it will drive down prices and increase mortgage rates to the consumer. Even a slow sell off will create higher mortgage rates.
The Federal Reserve is looking for a slow increase in mortgage rates over many years, but probably not starting until late to mid decade. The sell off will probably trigger steeper increase in mortgage rates. This will not only slow down buying, but push home values down lower. For Example, if mortgage rates increase from 4% to 6% that’s about a 25% decrease of purchasing power for the buyer.
I think this trap is starting to be realized by several major players.
Fed minutes send warning on durability of bond buying
By Alister Bull and Pedro da Costa
The Fed has more than tripled the size of its balance sheet since 2008 to around $3 trillion through purchases of bonds designed to hold down the cost of long-term borrowing and spur a stronger recovery.
The Fed has said it will reduce the size of its balance sheet when the time comes to tighten monetary policy. The central bank will use its March meeting to review the language it has used in its post-meeting statements pertaining to the possible costs of unconventional policy, the minutes said.
In an interview with Reuters on Tuesday, Atlanta Federal Reserve Bank President Dennis Lockhart said the Fed’s ultra-loose policy stance is still justified.
“I would not say at this point that, in any respect, the costs, which are largely longer-term and speculative, outweigh the benefits of maintaining a highly accommodative climate,” he said.
And some other articles.
The other side of QE
The Fed’s D-Rate: 4.5% At Dec 31, 2013… And Dropping Fast
Nouriel Roubini Is Bullish…For Now: “The Mother of All Bubbles” Has Begun
In English, the dangers of a long term assets bubbles and purchasing 10% of the mortgage bonds to lower mortgage rates to increase home values is an asset bubble. It’s impossible to turn to history and see what are the possible comes of all this bond purchasing, because the US never been down this road before. Now, the exit from this policy very problematic. Finally, Congress is getting worried too.
Congress Asks Bernanke For Full Risk Analysis On Fed’s Soaring Balance Sheet
Submitted by Tyler Durden on 02/21/2013
The Committee has previously written to you with concerns about monetary policy in the United States. In July 2011, after a meeting between Committee staff and Federal Reserve staff, the Committee requested that you provide all Federal Reserve studies used to determine the value of Federal Reserve assets and “what the potential losses would be based on different unwind scenarios regarding the Federal Reserve’s portfolio…” The Committee also requested that you provide “all estimates and analysis of the potential costs of payment of interest on reserves” that would incentivize banks to maintain excess reserves. In response, you provided only publicly released studies, and you did not provide any precise estimates of the future cost of reserve interest rate payments
Good, I’m glad there is finally more people taking notice. This is a start but we need to do more the can-kicking is not working out.
The Federal Reserve’s QE purchases of the 10% mortgage debt market has created ultra low mortgage rates. However, it looks like it will do the opposite once these security must be sold. This creating a boom and bust cycle. The whole point and design of the Federal Reserve was to prevent large swings in the economy, fight inflation, and promote stability. This this QE program providing stability?
Or you can listen to this guy?
Bernanke: “There Is No Bubble”
10 things Realtors say to pressure appraisers
Today I want to share 10 subtle (or not so subtle) statements that in a small way can come across as trying to influence an appraiser’s value. These statements are very normative in the real estate industry, aren’t they?
10 questions and phrases to pressure appraisers to “hit the number”
* I’ll be happy as long as it appraises for at least the sales price.
* Do your best to get the value as high as possible.
* The market has been “on fire”. You shouldn’t have any trouble with the appraisal.
* Is it going to come in at “value”?
* I never say this, but if you can just work some magic this time, you’ll be my hero.
* If this doesn’t “appraise”, the seller is going to go into foreclosure.
* I would be shocked if it didn’t “appraise”.
* I really hope this works out. No pressure or anything though.
* The son has cancer. It’s been really hard on the family. The last piece to wrapping up this transaction is the appraisal.
* I don’t want to ask you to do anything unethical, but just do your best.
… coercion is kind of a big ethical deal. It’s rather a matter of simply using lingo that is a regular part of real estate culture – but maybe shouldn’t be. When we begin to really think more deeply about subtle statements like these, what is the real goal of using them? And are statements like this ethical in the eyes of the DRE?
The Pressure Test: How would you know if you are trying to influence an appraiser’s value? It really comes down to motives. If you find yourself saying one of the statements above while talking with an appraiser, ask yourself: “Why am I saying this? What is my goal here?” If the appraiser asked, “Why did you tell me that?”, what would your response be?
“…Sooner or later the Fed will have to sell these assets and when they do it will create a problem they originally wanted to avoid…”
The Fed can hold all bonds til maturity – no selling is necessary.
According to ZeroHedge once interest rates interest the Fed will have start paying interest on IOER foreign deposits. So, these mortgages returns will not pay a high return to pay interest to these foreign bank.
[S]ince it is improbable that excess reserves held by any banks will decline at all in the coming years, one can also assume that the annualized interest paid to foreign banks, which would amount to at least $5 billion pear year, every year, will continue indefinitely as a direct Fed subsidy to the bottom line of Foreign banks. From ZeroHedge
All of this, of course, ignores what happens should the Fed hike interest rates across the board, which will also mean rising the rates on IOER, once inflation finally strikes: simple math means a 1% IOER means some $20 billion in interest paid to foreign banks, 2% – $40 billion, 5% – $100 billion paid to foreign banks, and so on. Putting these numbers in perspective, let’s recall that Italy’s third largest bank just got a €3.9 billion bailout (its third), and has a market cap of some €2.9 billion.
This is me again. But can’t just QE the interest on the foreign deposits too? Or will they need to sell the loans to pay the foreign deposits? Will foreign banks withdraw the the money and it will no longer be a problem?