Questions about mortgage backed securities and the federal budget

Sullivan

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Nov 24, 2001
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For those of you who work in the financial services industry:

Over the past few years, the federal government has been buying mortgages backed securities from banks (something like $2.7 trillion). I believe this was done to keep the housing process booming and to keep mortgages rates artificially low. Now the federal government will not only stop buying them, but they are going to begin selling their portfolio to the tune of $95 billion per month.

Here are my questions: Who is going to buy these loans that have a yield of just 2.5% to 3.0%, when rates on mortgage loans are now in the 5.50% to 6.00% range? Given the current interest rates, what type of haircut will the federal government take? And how much will it cost the federal government when they are selling $95 billion per month? And assuming the federal government takes a haircut, will this need to be recognized as part of the federal deficit?
 

NJPSU

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May 29, 2001
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For those of you who work in the financial services industry:

Over the past few years, the federal government has been buying mortgages backed securities from banks (something like $2.7 trillion). I believe this was done to keep the housing process booming and to keep mortgages rates artificially low. Now the federal government will not only stop buying them, but they are going to begin selling their portfolio to the tune of $95 billion per month.

Here are my questions: Who is going to buy these loans that have a yield of just 2.5% to 3.0%, when rates on mortgage loans are now in the 5.50% to 6.00% range? Given the current interest rates, what type of haircut will the federal government take? And how much will it cost the federal government when they are selling $95 billion per month? And assuming the federal government takes a haircut, will this need to be recognized as part of the federal deficit?
The Federal Reserve is buying MBS. The Federal Reserve is not the Federal Government. :rolleyes:

https://www.newyorkfed.org/markets/mbs_faq.html
 
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Sullivan

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Nov 24, 2001
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The Federal Reserve is buying MBS. The Federal Reserve is not the Federal Government. :rolleyes:

https://www.newyorkfed.org/markets/mbs_faq.html

From the Federal Reserve:

The Federal Reserve does not receive funding through the congressional budgetary process. The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.



Although it may be true they don't receive funding through the congressional budgetary process, they would normally be profitable because revenue (interest income) would normally exceed their expenses (income expenses). They wouldn't normally need to recognize losses, because the assets weren't being sold.

In this case, you have a massive amount of upside down mortgages that are being sold at a discount.
 
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junior1

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May 29, 2001
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From the Federal Reserve:

The Federal Reserve does not receive funding through the congressional budgetary process. The Fed's income comes primarily from the interest on government securities that it has acquired through open market operations. After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.



Although it may be true they don't receive funding through the congressional budgetary process, they would normally be profitable because revenue (interest income) would normally exceed their expenses (income expenses). They wouldn't normally need to recognize losses, because the assets weren't being sold.

In this case, you have a massive amount of upside down mortgages that are being sold at a discount.
I've bought mbs before as I'd bet many on here have. I don't know how the fed will get rid of theirs, but nobody is going to buy a 2-3% security without a discount. (Although the way some of our politicians seem to understand economics, the fed might find a lot of willing buyers on capitol hill)
 
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LionDeNittany

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May 29, 2001
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DFW, TX
For those of you who work in the financial services industry:

Over the past few years, the federal government has been buying mortgages backed securities from banks (something like $2.7 trillion). I believe this was done to keep the housing process booming and to keep mortgages rates artificially low. Now the federal government will not only stop buying them, but they are going to begin selling their portfolio to the tune of $95 billion per month.

Here are my questions: Who is going to buy these loans that have a yield of just 2.5% to 3.0%, when rates on mortgage loans are now in the 5.50% to 6.00% range? Given the current interest rates, what type of haircut will the federal government take? And how much will it cost the federal government when they are selling $95 billion per month? And assuming the federal government takes a haircut, will this need to be recognized as part of the federal deficit?

The short answer is they will sell at a discount.

That said, are they selling or allowing them to roll off?

Most of these lower coupon securities have amortozed significantly.

LdN
 

2lion70

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Jul 1, 2004
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I've bought mbs before as I'd bet many on here have. I don't know how the fed will get rid of theirs, but nobody is going to buy a 2-3% security without a discount. (Although the way some of our politicians seem to understand economics, the fed might find a lot of willing buyers on capitol hill)
Discounts and premiums are normal in the bond, MBS markets.
 

BW Lion

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Apr 9, 2020
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For those of you who work in the financial services industry:

Over the past few years, the federal government has been buying mortgages backed securities from banks (something like $2.7 trillion). I believe this was done to keep the housing process booming and to keep mortgages rates artificially low. Now the federal government will not only stop buying them, but they are going to begin selling their portfolio to the tune of $95 billion per month.

Here are my questions: Who is going to buy these loans that have a yield of just 2.5% to 3.0%, when rates on mortgage loans are now in the 5.50% to 6.00% range? Given the current interest rates, what type of haircut will the federal government take? And how much will it cost the federal government when they are selling $95 billion per month? And assuming the federal government takes a haircut, will this need to be recognized as part of the federal deficit?
This is a decent article that somewhat explains the mechanics.

 
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Sullivan

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This article suggests they will likely be bought by foreign buyers:


This article provides a different perspective: