23 Aug 2014

Fun Facts About Mortgages

Banking, Federal Reserve 16 Comments

==> Currently the Fed holds about $1.7 trillion in mortgage-backed securities. The ostensible purpose of this massive bond-buying was to prop up the mortgage market, which props up the real estate market, which ultimately provides relief to struggling homeowners who are underwater.

==> The total outstanding mortgage debt on one- to four-family residences is $9.9 trillion. (That’s the smallest breakdown I could quickly find at the Fed’s site.)

==> Using back-of-the-envelope calculations, it seems that for as much money as the Fed has spent on mortgage-backed securities, it could have covered the shortfall (the difference between property value and mortgage debt) for every individual homeowner in America.

==> I’m not saying that would have been a good idea, obviously, and there would be technical problems in how one would implement such a plan. But it makes you wonder how much brainstorming Federal Reserve officials actually did, if they’ve been sleepless since 2008 worrying about beleaguered families and seeing what they actually chose to do with their discretionary powers.

16 Responses to “Fun Facts About Mortgages”

  1. Major.Freedom says:

    The Fed is for the banks.

    The intellectuals are given lucrative cushy jobs to make people believe what’s good for bankers is good for everyone.

  2. Enopoletus Harding says:

    It’s almost like the Fed thinks more about the fates of investors in MBS than in the fate of the home-occupiers that are supposed to be financing the incomes of those investors.

  3. Enopoletus Harding says:

    This just in:
    nytimes.com/2014/08/24/opinion/sunday/why-interest-rates-need-to-stay-low.html
    According to the Mankiev Rule:
    http://research.stlouisfed.org/fred2/graph/?g=Inq
    the FEDFUNDS should already be at over 1%.
    The NYT speaks for the speculators.

    • Enopoletus Harding says:

      The answer, laid out in recent remarks by Ms. Yellen and Stanley Fischer, the Fed vice chairman, is to use bank regulation and financial oversight to ensure that institutions and investors do not use low rates as a springboard for speculating.

      -Riiight. The old “we can channel credit away from the stock market” myth of the late 1920s.

      • Enopoletus Harding says:

        Here the Fed is still too lax, as in its recent indulgence of too-big-too-fail banks that have failed to meet regulatory demands intended to reduce risks and prevent bailouts.

        -This is what happens when you lose copy editors.

  4. Tel says:

    Using back-of-the-envelope calculations, it seems that for as much money as the Fed has spent on mortgage-backed securities, it could have covered the shortfall (the difference between property value and mortgage debt) for every individual homeowner in America.

    The difference is the Cantillon Effect: when you tip freshly printed money in at the top, some of it trickles down, but some of it gets soaked up by the guys in the middle. Of course, by propping up house prices, you also make them unaffordable to new buyers. Kind of a zero sum game.

    What a lot of people forget is that “Ginnie Mae” (GNMA) wrote insurance contracts to protect the MBS owners, as backed by the US taxpayers (who have no capacity to cover such a loss). Thus, the Fed is really protecting the US government.

  5. Transformer says:

    Genuine question: Why do you say “The ostensible purpose of this massive bond-buying was to prop up the mortgage market, which props up the real estate market, which ultimately provides relief to struggling homeowners who are underwater.”. Did they say that was the purpose at any time ?

    I can see more obvious reasons:

    1. To take bad assets from the balance sheets of banks in the hope it will keep them solvent.
    2. To boost the money supply in the hope of boosting AD

    I guess ultimately (and indirectly) this might “provide relief to struggling homeowners who are underwater.” but I had never thought that was the purpose. Obviously if it was then just giving money to homeowners who are underwater would have worked better.

    • Bob Murphy says:

      Transformer try this article for example. It refers to Bernanke describing QE3:

      Purchases of housing debt should help the housing market, which he called “one of the missing pistons in the engine.”

      “Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing,” he said.

      • Transformer says:

        Interesting, thanks

  6. Philippe says:

    “it seems that for as much money as the Fed has spent on mortgage-backed securities, it could have covered the shortfall”

    Yeah but a mortgage backed security is basically a bundle of loans. So the money the Fed “spent” on buying them is supposed to be repayed, plus interest.

  7. Gamble says:

    “which ultimately provides relief to struggling homeowners who are underwater.”

    Oh but it does so much more. This money changes my neighborhood. Changes culture. Changes how many loud motorcycles I have to deal with. Changes how many kids get to play instead of work.

    These monetary policy actions fundamentally alter the social fabric.

    • Major.Freedom says:

      Underappreciated point.

      The most destructive effect of inflation is actually psychological. From the chaos of the business cycle, to the large and “unfair” gains made by people who just happen to be closest to the money spigot, to turning the perception if the state from “necessary evil” to the source of unlimited money and prosperity, inflation has devastating effects on individual psychology and the so-called “social fabric”.

      • Gamble says:

        Glad to hear I am not alone in my thinking.

        I said social fabric so that other people could relate however I see you use the word psychology.

        At the end of the day, government tinkering alters reality to the advantage of those with reduced moral standards and fills our market place with products, services and behaviors that have little to no value nor utility and otherwise would not exist.

  8. LVM says:

    There were quite a few homeowners who took out interest-only mortgages (10 yrs IO term was typical) in bubble markets such as California, AZ, NV and Florida. Usually this mortgage reverts to a fully amortized payment over a 20 yr term. These lower rates were to help the homeowners continue to pay these mortgages however the kicker is that the homeowner will also have to pay mortgage insurance.

    The gov’t programs HARP/HAMP are a great idea however they only apply to mortgages held by a GSE (Fannie/Freddie). There are thousands of mortgages sold as private label securties that are not eligible under this program.

    Lastly the GSE’s (Fannie at least) are sending all profits to the US Treasurary and it’s The Fed that is buying these GSE securities being that other than FHA there are no other players in the mortgage market. Almost every mortgage gets sold to a GSE.

Leave a Reply to Philippe

Cancel Reply