Bask on MBS
(Note for newcomers: “Bask” is short for “Blog ask.” There is no begging at Free Advice.)
I was looking at the NY Fed’s page on its SOMA holdings and noticed that in a footnote on the $965 billion in mortgage-backed securities it says:
Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Current face value of the securities, which is the remaining principal balance of the underlying mortgages.
So help me out here. Where those “toxic” MBS guaranteed by the agencies all along? If so, then why were they trading below par (before The Ben Bernank saved the day)?
Or, did the agencies guarantee them only after the Fed bought them?
Finally, if the housing market crashes again and a bunch more people default, does that mean the taxpayers will possibly have to make the Fed whole?
Where those “toxic” MBS guaranteed by the agencies all along? If so, then why were they trading below par (before The Ben Bernank saved the day)?
Yes; because of speculation that the agencies would have to default on this promise. (There was an Arnold Kling post back in ’08 about how “FM/FM can do very well as long as they can borrow at these rates, but the moment their borrowing costs go up, they’re hosed.”)
And this is why I’m so skeptical of those who say, “hey, the Fed made a profit on all its interventions, no harm done!” No, the Fed is significantly overvaluing the debt on its balance sheet and paid way too much for it. This will have to show up in the value of the dollar at some point.
(I know, you wanted a more well-sourced answer. Sorry.)
Yes, all of the mortgage backed securities that the Fed purchased are already effectively government bonds. The Treasury is already on the hook for them.
The toxic junk, on the other hand, is privately issued mortgage backed securities. The Fed hasn’t bought any of those directly, but they are on the hook for some because of the Bear Stern bailout. When they were making loans to banks and other fiancial institutions, they were indirectly on the hook for them, but that has greatly dissapated now.
The Fed owns lots of Treasury bonds and lots of Treasury guaranteed mortgaged backed securities. And not much other stuff these days.
From the Federal government point of view, inclusive of the Fed, the Freddie and Fanny stuff is still toxic junk. It is just that having the Fed buy them rather than someone else makes little difference short of default by the Treasury.