Fed Ends Its Purchasing of Mortgage Securities
The Federal Reserve’s single largest intervention to prop up the American economy, its $1.25 trillion program to buy mortgage-backed securities, came to a long-anticipated end on Wednesday.
The program has been credited with holding mortgage interest rates at near-record lows and slowing the nationwide decline in home prices that threatened to send the economy into an extended slump.
When the central bank announced the program two days before Thanksgiving 2008, the spread, or difference, between the rates for a 30-year fixed-rate mortgage and a 10-year Treasury note exceeded 2.5 percentage points, or 250 basis points, nearly twice the typical spread.
Demand for mortgage bonds had been frozen since the federal takeover of Fannie Mae and Freddie Mac, the giant mortgage-finance companies, in September 2008. “We were in a deflationary spiral, causing mortgages to go underwater, more foreclosures and a further decline in housing prices,” said Susan M. Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. “The potential maelstrom of destruction was out there, bringing down not only the housing market but the overall economy. That’s what was stopped.”
She called the Fed’s mortgage purchases “the single most important move to stabilize the economy and to prevent a debacle.”
The program was initially for $500 billion. The purchases began in January 2009, and in March, the Fed raised the goal to $1.25 trillion. The purchases were to end by Dec. 31, but in September, the Fed said the purchases would taper off more slowly, ending on March 31.
The purchases caused rates for 30-year mortgages, which exceeded 6 percent in late 2008, to fall to below 5 percent by March 2009. They are hovering slightly above 5 percent today.
Economists had feared that mortgage interest rates would climb sharply after the 15-month program, but those fears have abated in recent weeks. Fed policy makers have suggested that they would consider resuming the purchases if conditions warranted it, but only as a last resort.
“Financial markets have improved considerably over the last year, and I am hopeful that mortgages will remain highly affordable even after our purchases cease,” Janet L. Yellen, the president of the Federal Reserve Bank of San Francisco, said in a speech on March 23. “Any significant run-up in mortgage rates would create risks for a housing recovery.”
Ms. Yellen is President Obama’s choice to be the next vice chairwoman of the Fed, after Donald L. Kohn retires in June, but she has not been formally nominated.
Lawrence Yun, chief economist at the National Association of Realtors, said the private market for mortgage-backed securities had sufficiently recovered for the Fed program to end without a hiccup.
“Just as the Fed is stepping out, private investors appear to be stepping in,” Mr. Yun said. “As long as there are buyers on Wall Street for mortgages, it should have no impact on consumers. Having said that, it’s possible that the mortgage rate could be higher later in the year, but that would be due to macroeconomic forces unrelated to the Fed purchase program.”
A major factor in that recovery was the government’s announcement last December that it would guarantee debts owed by and securities issued by Fannie and Freddie, according to David Crowe, chief economist at the National Association of Home Builders.
While the future of the two mortgage-finance entities remains uncertain, the government backing has been particularly reassuring for foreign investors, including the Chinese and Japanese central banks, that hold securities based on mortgages originated in the United States, Mr. Crowe said.
Another reason mortgage interest rates are not expected to rise sharply is that the supply of the securities has not increased substantially, said Michael Fratantoni, vice president for single-family research at the Mortgage Bankers Association.
“Home sales really are running at quite a slow pace, and we haven’t seen much of a spring buying season yet, so there haven’t been a lot of mortgages originated or securities issued,” Mr. Fratantoni said. He projected that as the job market recovered, mortgage rates for 30-year mortgages would rise to 5.8 percent or so by the end of the year.
For consumers, the biggest impact of the Fed purchases was to encourage mortgage refinancing, Mr. Fratantoni said. “Although they did induce some additional sales, more importantly, the Fed enabled a lot of homeowners to have lower monthly payments,” he said.
Brent W. Ambrose, professor of real estate in the Smeal College of Business at Pennsylvania State University, said the Fed had “done a credible job of telegraphing what its intentions were,” giving the markets ample time to prepare for the end of the program.
By SEWELL CHAN
Source: NY Times