Feds Step into Secondary Mortgage Market in a Big Way

We’re from the government, and we’re here to help. It’s a funny, odd saying, but on Tuesday the saying rang truer than ever for most secondary mortgage market participants, after the Federal Reserve said it was initiating a program to purchase up to $100 billion GSE direct obligations and $500 billion MBS backed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. The news is a big shot in the arm for the ailing agency MBS markets, which have been for weeks facing a growing fear over a dearth of overseas buyers and competition from FDIC-insured commercial banking debt. See the Fed’s announcement. “Prior to Fed’s announcement, we were worried that there is a significant uncertainty regarding overseas investor demand for agency bonds,” analysts at Bank of America Corp. (BAC) said Tuesday. “This is not a big issue now as the Fed’s purchase activity should more than offset any potential selling of agency MBS by overseas investors.” It wasn’t just BofA traders that were worried, of course. Spreads on Fannie Mae current-coupon fixed-rate securities versus interpolated 5 and 10-year Treasury notes had jumped up to 288 basis points by last Thursday, their highest level since both GSEs were placed into federal conservatorship. “Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late,” the Fed said in a statement. “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.” The government will begin purchasing GSE direct obligations next week, while it expects to begin purchasing MBS before year-end, and will continue to do so for several quarters. Various research estimates shared with us by analysts early Tuesday suggest that government purchases will run over six quarters, and largely absorb net issuance volume in the agency market. The move is one that is clearly designed to push down mortgage rates for the foreseeable future; while rates haven’t been high by historical standards, they have been extremely volatile this year as even the agency MBS markets sputtered amid a burgeoning credit crisis. HousingWire‘s sources on Capitol Hill suggested that the Fed’s intervention also was likely designed to blunt any push from real-estate transaction specialists, including home builders and realtors, that have in recent weeks been pushing for a federal subsidy on mortgage rates for home buyers. “Any discussion of a federal buydown on mortgage rates is moot when the government is directly soaking up net issuance in the entire agency market,” said the source, a lobbyist that asked not to be identified in this story. Broad secondary market intervention, not just mortgages The announcement of direct intervention into the U.S. mortgage market came part-and-parcel with a separate plan to support the broader ABS market, with the Fed also saying Tuesday it would establish a Term Asset-Backed Securities Loan Facility to grease the wheels of ABS issuance, as well. ABS issuance has literally dried up as the U.S. capital markets ground to halt in recent weeks; according to data from Asset-Backed Alert, October saw just $400 million in net ABS issuance, with zero issuance volume thus far in November. The newly-established TALF will permit the NY Fed to lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans, the Fed said. The Treasury will provide $20 billion of credit protection to the FRBNY in connection with the TALF, via funding from the Troubled Asset Relief Program authorized by Congress earlier this year. “The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans,” the Fed said in a statement. “Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.” Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.