The New York Fed released it's FAQS (frequently asked questions) on the reinvestment of Agency debt payments into MBS announced in Wednesday's FOMC Statment. It's not that the Fed didn't already have the ability to do this, but the announcement specifically names MBS as is an overt show of support for the mortgage market. In other words, they could have just done this anyway, but now they've committed to it. It's a confidence builder... Here are some of the details as the Fed sees them:
Why is the Desk reinvesting principal payments on agency debt securities and agency mortgage-backed securities (MBS) in agency MBS?
The NYFed handles the market operations for the FOMC. Their first part of the answer to the above question is "because the FOMC said so..." in not so many words. Secondly, they reiterate the obvious implications: "The FOMC indicated that the policy was intended to help support conditions in mortgage markets."
Why does the Federal Reserve's System Open Market Account (SOMA) hold a portfolio of agency debt and agency MBS, and what is its size?
This addresses the difference between what the Fed was doing / could do with all the money it receives from it's MBS portfolio, what it will now be doing, and how big the thing is anyway! "The Federal Reserve purchased approximately $1.4 trillion of agency debt and agency MBS between December 5, 2008 and March 31, 2010. Some of these securities subsequently matured or were prepaid. On August 20, 2010, the FOMC decided to reinvest principal payments from agency debt and agency MBS in longer-term Treasury securities. Subsequently, on September 21, 2011, the FOMC decided to reinvest these payments into agency MBS. The total size of the agency debt and MBS portfolio as of September 21, 2011 was $988 billion."
What types of agency MBS will the Desk purchase? When will purchases begin?
The Fed says that they'll "LIKELY" concentrate on newly issued agency MBS (TBA), but leave themselves the option to buy other MBS as long as it's Ginnie, Freddie, or Fannie. They specifically state that "CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash" are not equivalents are NOT ELIGIBLE. The implication of all this is that effects of this buying will be focused on the most important MBS Prices as far as lender rate sheets are concerned. In other words, the Fed's here, yet again, to put the backstop down behind the MBS market.
How much will the Desk purchase each month in agency MBS securities and how will this be communicated?"
For the period from October 3 to October 13, the Desk plans to purchase approximately $10 billion in agency MBS." That amount was determined by a proration of sorts... Bottom line, near the beginning of the month, The Fed will release a tentative amount based on the payments it expects to receive from mid-month to mid-month. They released an estimate of MBS payments expected on September 13th to October 13th and the $10 bln mentioned above is the prorated amount for 10/3 - 10/13. If that pace continues, it means that the Fed will effectively be sponsoring a majority of new MBS Production. This time around, they leave more room for other market participation than in the past.
Are the Federal Reserve's transactions in agency MBS related to the U.S. Treasury's transactions of agency MBS?
Directly from the Fed: "No. The Federal Reserve's transactions in agency MBS are separate from, and unrelated to, the U.S. Treasury's MBS transactions." Pretty simple... The Fed also noted that other other Fed holdings, such as Maiden Lane portfolios aren't related to this operation.
How often will purchases take place?
It's important to note that the Fed won't simply be purchasing a static amount each day! "Purchases will be conducted on a frequent basis over the course of each month, and will be guided by general MBS market conditions, including, but not limited to, supply and demand conditions, market liquidity, and market volatility. "
Here's the full release: http://www.newyorkfed.org/markets/ambs/ambs_faq.html