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The Fed now owns nearly 1/3 of all U.S. mortgages

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Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#21

Post by boulos »

vermilingua wrote: post #12
alex_young wrote: post #4

That is interesting, but can someone explain why this is a bad thing?

IANAE(conomist), but my naive interpretation is this: let’s say the pandemic causes 25% of mortgage holders to become delinquent, a number I don’t think is unreasonable. If the Fed owns a third of all mortgages (and their ownership is a normal distribution of all mortgages, I have no idea if this is true), that’s 25% of $2T that is suddenly at risk. If the total Fed balance sheet is $7T, that’s 7% of their total asse…

Actually, your 25% delinquency rate seems unreasonable. During the financial crisis, the subprime delinquency rate peaked at 26% [1] but the overall (whole US market) rate was just over 9%.

Delinquency is also mostly just about being a leading predictor of foreclosure or some sort of renegotiated payment structure. The same stat suggests that foreclosures overall peaked at just over 2% (but up to 15% subprime) [1 again, but also 2 which is more clear on 2.23%].

So I’d assume something closer to 2-5% foreclosure, depending on your estimates of benefits policy. Even in foreclosure, there’s still recovery (financially).

In fact, Goldman Sachs might even make a profit re-selling the mortgages it bought off of Fannie / Freddie as part of its $1.8B court-mandated “consumer relief” program [3]. It’s unlikely the Fed would be as “good” at this as Goldman, but a likely unwinding strategy would be to sell them to similar investor groups. Either way, not going to $0 :).

[1] https://www.statista.com/statistics/205959/us-mortage-delinq...

[2] https://www.google.com/amp/s/www.statista.com/chart/amp/1546...

[3] https://www.google.com/amp/s/www.bloomberg.com/amp/opinion/a...

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#23

Post by nradov »

remote_phone wrote: post #8
hn_throwaway_99 wrote: post #7

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

It is mathematically impossible for the "rest of the world" to dump US treasuries. If someone is selling then someone else is buying.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#24

Post by dternyak »

JackFr wrote: post #14
remote_phone wrote: post #8

Earlier quoted context omitted.

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the…

> The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars.

It strikes me as extremely odd that it's become so normalized that the U.S.'s role in trade is simply as a buyer of goods.

In any transaction, both parties are typically better off after having made the transaction, else one party would refuse.

The U.S. clearly benefits by acquiring goods, but is China really left scratching their heads with what to do with the dollars (and then throwing a dart and purchasing treasuries with their overflowing dollars)?

If China (in aggregate) is never interested in buying our goods, why would they want to compound the number of tokens that can be redeemed for future goods (by buying bonds)? Do they simply not want to buy goods now, but know they will want to in the future? Are they entirely interested only in the assets, but think the goods are not valuable, or at least not valuable for them, but maybe are for others? Doesn't that put into question the value of any assets the country might have to offer if the goods that the country provides are seemingly undesirable?

Clearly, the value the U.S. is providing can't simply be as the purchaser of a good. The U.S. is trading future obligations for current goods, and the trading partner must have some belief that they will eventually execute that option on future obligations, or trade the future obligation to someone else who will want to execute it, else this token clearly has no value.

However, I do also wonder how much of the demand of U.S. dollar is simply a system of inertia. At some point the trading partners may realize they have no interest in acquiring tokens that they will never redeem, even if this token can be compounded further for more tokens that will never be redeemed. Currently, it seems China is interested in acquiring these tokens because of the reserve currency status, as they trade with other partners in.

The other possibility is this entire narrative is incorrect, and there are other benefits to running massive trade surpluses beyond the future token redemption. Skill building could be one these benefits - the deficit trading partner (U.S.) is shaping the development of labor markets in an journeyman-like form.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#25

Post by JackFr »

olliej wrote: post #3

Does the fed get the interest income from those mortgages? Because if it’s not getting 100% of that interest it’s simply bailing out speculative loans by banks. What are the rules for the fed taking on mortgages etc? I would want a max price of 80% of the value of the mortgage alongside the all proceeds portion so that banks can’t just make bad loans and then onsell them to tax payers

Taxpayers don’t need to bail out the Fed. The Fed literally creates money ex nihilo.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#26

Post by donmcronald »

throwaway4good wrote: post #17
hn_throwaway_99 wrote: post #7

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

The fed can keep interest rates low; it is literally what they are doing by buying the bonds. In principle you should see higher inflation and a falling currency. However this policy (aggressive buying of all kind of bonds) has been persued by the Europeans and Japanese for years and it haven't really caused a collapsing currency or high inflation. Some may argue that it suspends a natural reallocation of resources i…

If you print money, but only give it to the top 10% who use it to prop up the stock market, does that cause inflation? I don't understand how America can pump a couple trillion dollars into the economy and it doesn't seem to have any impact. If the average person is getting any of that it should cause inflation, shouldn't it?

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#27

Post by im3w1l »

hn_throwaway_99 wrote: post #7

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

Banks lending to people who cannot pay, and then selling the bonds to the fed. This becomes a handout both to banks, and anyone with lending access.

In the real economy it means that people will start -EV (negative expected value) projects. Because heads you win, and tails you default.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#28

Post by seiferteric »

nradov wrote: post #23
remote_phone wrote: post #8

Earlier quoted context omitted.

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

It is mathematically impossible for the "rest of the world" to dump US treasuries. If someone is selling then someone else is buying.

The Fed buys them, also they expire so they can simply stop buying more.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#30

Post by anoncareer0212 »

donmcronald wrote: post #26
throwaway4good wrote: post #17

Earlier quoted context omitted.

The fed can keep interest rates low; it is literally what they are doing by buying the bonds. In principle you should see higher inflation and a falling currency. However this policy (aggressive buying of all kind of bonds) has been persued by the Europeans and Japanese for years and it haven't really caused a collapsing currency or high inflation. Some may argue that it suspends a natural reallocation of resources i…

If you print money, but only give it to the top 10% who use it to prop up the stock market, does that cause inflation? I don't understand how America can pump a couple trillion dollars into the economy and it doesn't seem to have any impact. If the average person is getting any of that it should cause inflation, shouldn't it?

We spent so many years hearing it trickles down that we didn't realize how inherently backwards it really is - why would anything trickle down into actual purchases, they're always asset price pumps
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