The Federal Reserve has acquired up to US$1 trillion of mortgage bonds since March. The US central bank is trying to blunt the impact of the Covid-19 recession on American homeowners.
The Fed bought around US$300 billion of the bonds in each of March and April, and since then has been buying about US$100 billion a month. It now owns almost a third of bonds backed by home loans in the US. Buying the securities has pushed mortgage rates lower, with the average 30-year rate falling to 2.91% as of end August from 3.3% in early February.
That drop has allowed homeowners to refinance their mortgages, tantamount to giving them a raise by cutting their monthly loan payments. It’s also helped consumers buy homes. But the Fed’s efforts are causing its balance sheet to balloon, and with the central bank owning so many US home loans, it has unusually high power over setting mortgage rates.
The Fed’s purchase efforts started on March 15, when it said it was slashing its benchmark interest rate back to 0% and would purchase “at least” US$200 billion of mortgage-backed securities. On March 23, the central bank signaled its willingness to buy near-unlimited amounts of the debt, changing “at least” in its statement to “in the amounts needed.”
By the end of that month, mortgage purchases totaled US$291 billion, an average of US$23.4 billion per day. While the Fed has been buying mortgage bonds, it has bought even more Treasury securities: around US$1.8 trillion since mid-March, according to data from the New York Fed. The central bank’s purchases have expanded its balance sheet to US$7 trillion from US$4.7 trillion on March 18.
Morgan Stanley analysts pointed out in late March that the mortgage buying was running at eight times the pace seen in prior episodes of Fed purchasing under programs known as quantitative easing. The current monthly rate of about US$100 billion translates to about US$40 billion net, after accounting for borrowers’ principal repayments from the mortgage bonds already on the Fed’s balance sheet.
The latest statement from the Fed has promised to keep buying “at least at the current pace.” If the central bank does so, by year’s end it will have purchased about US$1.4 trillion in mortgage bonds — and added around US$900 billion net to its holdings.
The QE strategy has two significant consequences for consumers – mortgage rates are low but home prices move up. Lenders are able to reduce rates and increase volume. This has sparked a buying and refinancing spree. Mortgage applications shot up over 54% in June compared to same month in 2019. Prices of homes moved up with inventory of homes fell in June by 27.4% year-on-year.
So the U.S. will have created an asset bubble (stocks, homes etc) driven by responses to a health pandemic. Is that acceptable? Don’t bubbles burst at some point? Then what? More stimulus and more chaos?
1. US Fed’s Mortgage-buying Spree at US$1 Tril With No End in Sight, Christopher Maloney, TheEdge CEO Morning Brief, September 3, 2020
2. Fed Policy Has Kept Mortgage Rates Low. It’s Also Driven Up Home Prices, Natalie Campisi, Forbes Advisor, July 28, 2020