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The Fed's $2.7T mortgage problem

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Re: The Fed's $2.7T mortgage problem

#71

Post by JumpCrisscross »

cs702 wrote: post #62

I'd be more concerned about the other ~$6.3T of holdings in the Fed's ~$9T balance sheet.[a] The Fed has publicly announced it will allow its bond holdings to mature, to the tune of ~$90B/month, without recycling the proceeds back into treasury and agency-sponsored mortgage-backed bonds. Given that all treasury bonds that mature and most mortgage bonds paid off via home sales are refinanced, private investors -- that…

> $1T/year that private investors must find to buy newly issued treasury and agency bonds

Yes.

> this will have a large, persistent effect on treasury yields and credit spreads

That's the point.

Re: The Fed's $2.7T mortgage problem

#72

Post by cs702 »

JumpCrisscross wrote: post #71
cs702 wrote: post #62

I'd be more concerned about the other ~$6.3T of holdings in the Fed's ~$9T balance sheet.[a] The Fed has publicly announced it will allow its bond holdings to mature, to the tune of ~$90B/month, without recycling the proceeds back into treasury and agency-sponsored mortgage-backed bonds. Given that all treasury bonds that mature and most mortgage bonds paid off via home sales are refinanced, private investors -- that…

> $1T/year that private investors must find to buy newly issued treasury and agency bonds Yes. > this will have a large, persistent effect on treasury yields and credit spreads That's the point.

Yup. You and I are 100% in agreement. :-(

Re: The Fed's $2.7T mortgage problem

#73

Post by unnamed76ri »

kmonsen wrote: post #48
anm89 wrote: post #39

Earlier quoted context omitted.

If they can't kill inflation by killing equity markets and bonds the last target left is the housing market. So if you believe that their true goal is to kill inflation at this point, which I more or less do, than the thing the Fed feels like it needs to do is to target housing prices directly and their best lever for that is the MBS on the balance sheet.

But if the inflation is not due to overconsumption in the US, but about global problems with supply side issues on the front and China in lockdown not helping at all, how does it make sense to cause a housing crash? I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.

Inflation’s main cause is printing trillions of dollars in unbacked currency. The Trump admin and now the Biden admin are very fond of doing so for the sake of short term political advantage.

Re: The Fed's $2.7T mortgage problem

#74

Post by dvt »

qeternity wrote: post #59
dvt wrote: post #30

> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill. I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point . The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDO…

> The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year CDOs did not blow up the housing market. The housing market blew up the CDO market. In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.

> CDOs did not blow up the housing market. The housing market blew up the CDO market.

The two were indistinguishable (CDOs == buckets of over-leveraged mortgages), so I'm not sure what your point is here. No one really knew/cared what was in those CDOs, so people were trading them at face value. I don't think recent home owners are even remotely as leveraged as they were in 2008, so we're not risking a cascading blow-up effect.

House prices went up because of QE + high demand. QT will decrease demand at such high prices, and thus lower prices; we're already seeing this happen due to interest rate hikes. Undoubtedly we'll see some foreclosures, but I don't think it will be a bloodbath.

Re: The Fed's $2.7T mortgage problem

#75

Post by camnora »

> If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury.

Why does this reduce the amount of funds to the treasury? The losses are on the Feds balance sheet. My understanding is that the Treasury is not involved here, but the article hints at them being affected. Is it implying that treasury yields will rocket higher???

> In that scenario, expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people.

If the Fed takes a loss, doesn't this mean that base money supply increases? Sure it will be drawing liquidity out of the system, but in the long run, it will leave more money in the system compared to where they started with QE.

Re: The Fed's $2.7T mortgage problem

#76

Post by vkou »

gopher_space wrote: post #68
vkou wrote: post #29

Earlier quoted context omitted.

My guess is rising wages. When wages go up, it can either go at the expense of profits, or at the expense of prices (Or, most usually, both). The labour shortage in the pandemic created upward wage pressure, which added to existing pressure[1] caused by rising housing/healthcare costs. Notice how interest rates went up, as unemployment hit an all-time low? Capitalists hate low unemployment, as it causes wages to go u…

> As a result, businesses either have to raise wages, or shut down, or significantly reduce their hours. If these were your only choices you were on the edge of profitability right before a global pandemic hit. Plenty of reasons for that. Commercial Rent Control is "progressive" and the people who own property like this can afford to let it sit vacant indefinitely and will literally abandon this amount of profit beca…

This started before the pandemic hit, the pandemic just accelerated the growth of housing prices in those towns, as remote-workers started moving to them.

Re: The Fed's $2.7T mortgage problem

#77

Post by JumpCrisscross »

kmonsen wrote: post #48
anm89 wrote: post #39

Earlier quoted context omitted.

If they can't kill inflation by killing equity markets and bonds the last target left is the housing market. So if you believe that their true goal is to kill inflation at this point, which I more or less do, than the thing the Fed feels like it needs to do is to target housing prices directly and their best lever for that is the MBS on the balance sheet.

But if the inflation is not due to overconsumption in the US, but about global problems with supply side issues on the front and China in lockdown not helping at all, how does it make sense to cause a housing crash? I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.

> how does it make sense to cause a housing crash?

Less housing demand presumably means less home construction and renovation, which eases the strain on supply-chain limited resources. Lower home prices also reduce the amount of equity sellers, or HELOC borrowers, can spend on NFTs or whatever [1].

[1] https://en.wikipedia.org/wiki/Wealth_effect

Re: The Fed's $2.7T mortgage problem

#78

Post by JumpCrisscross »

camnora wrote: post #75

> If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury. Why does this reduce the amount of funds to the treasury? The losses are on the Feds balance sheet. My understanding is that the Treasury is not involved here, but the article hints at them being affected. Is it im…

> Why does this reduce the amount of funds to the treasury?

It's an accounting thing [1]. When the Fed makes a profit, it remits it to the Treasury [2]. (I believe this is an anachronism from the gold standard days, but not sure.)

[1] https://www.stlouisfed.org/on-the-economy/2018/september/fed...

[2] https://www.wsj.com/articles/fed-sent-88-5-billion-in-profit...

Re: The Fed's $2.7T mortgage problem

#79

Post by JumpCrisscross »

s1artibartfast wrote: post #3

I read the article twice an I don't understand the challenge posed by leaving the mortgages on the balance sheet. I don't think that the fed has wo worry about freeing up the capital to relocate because they printed it into existence in the first place. They also don't want to do more QE because the market is already overheated.

> don't understand the challenge posed by leaving the mortgages on the balance sheet

There isn't one. The Fed wants to tighten financial conditions, and selling mortgages is a good way to do that for the same reason buying mortgages (or more precisely, mortgage-backed securities) is a good way to loosen them. Mortgages are simply more quotidien than e.g. Treasuries, and so could bring novel political risks.

Re: The Fed's $2.7T mortgage problem

#80

Post by NovemberWhiskey »

tempfs wrote: post #66
ethbr0 wrote: post #27

Earlier quoted context omitted.

The recession of 2008 was absolutely fixed , in that bank collapses were prevented, highly leveraged products based on bad loans were drained from the balance sheets, underwriting was tightened up, and economic activity rebounded. That fix was just never paid for , in terms of shrinking Fed balance sheets and renormalizing rates.

You can't halt a bank collapse, but you can postpone it and attempt to reduce the impact with inflation which is exactly what has happened. Additionally, if you don't address the lack of regulation that allowed the collapses in 2008, which we absolutely did not, it will keep happening and those future occurrences will grow in severity. Since now, in order to 'make money', the frauds have to be bigger, faster, and mor…

>You can't halt a bank collapse, but you can postpone it and attempt to reduce the impact with inflation which is exactly what has happened.

What does that even mean?

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