The Federal Reserve reported on their weekly purchases of agency mortgage-backed securities (MBS).
In the week ending March 17, 2010, the Federal Reserve purchased a gross total of $10.6 billion agency MBS. In that week the Fed sold $601 million mortgage-backeds (supported the roll), for a net total of $10.0 billion agency MBS purchases. This amount is unchanged from the previous three reporting periods.
The goal of the Federal Reserve's agency MBS program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. (N.Y. Fed MBS FAQs)
Since the inception of the program in January 2009, the Fed has spent $1.236 trillion in the agency MBS market, or 98.9 percent of the allocated $1.25 trillion, which is scheduled to run out at the end of this month. With 10 days left in the program, there is now only $14.1 billion in funding remaining.
Of the net $10.0 billion purchases made in the week ending March 17, 2010:
- $300 million was used to buy 30 year 4.0 MBS coupons. 3 percent of total weekly purchases ($300 million less than last week)
- $6.0 billion was used to buy 30 year 4.5 MBS coupons. 60 percent of total weekly purchases ($300 million less than last week)
- $2.5 billion was used to buy 30 year 5.0 MBS coupons. 25 percent of total weekly purchases ($1.1 billion more than last week
- $100 million was used to buy 30 year 5.5 MBS coupons. 1 percent of total weekly purchases ($100 million more than last week
- $900 million was used to buy 15 year 4.0 MBS coupons. 19 percent of total weekly purchases($600 million less than last week)
- $200 million was used to buy 15 year 4.5 MBS coupons. 2 percent of total weekly purchases (unchanged from last week)
48 percent of the mortgage-backs purchased were Fannie Mae MBS, 48 percent were Freddie Mac coupons. 4 percent were Ginnie Mae coupons. 89 percent of purchases were 30 year MBS coupons (83% last week)
The Fed's daily purchase average during the trading week was $2.0 billion per day, unchanged from last week and still enough to offset daily originator loan supply. If the Fed were to evenly disperse the remaining $14.1 billion over the next 10 trading session weeks, they would average $1.4 billion purchases per day or $7.05 billion per week (compare previous $8.03 billion per week)
Below is a chart illustrating the evolution of the Federal Reserve's Agency MBS Purchase Program. Notice over the past few months the Fed has reduced their purchases and used remaining funds to offset new loan production supply, 4.50 (RED) and 5.00 (GREEN) MBS coupons specifically, which has helped keep mortgage rates low relative to benchmark Treasury yields.
So far the gradual reduction in the Fed's weekly purchases has been counterbalanced by the slowdown in new loan production and an increase in non-Federal Reserve funded "down in coupon" demand (banks, hedge funds, insurance companies, loan servicers, money managers) (thanks to Fannie/Freddie delinquency buyouts).
In the remaining 10 days of the MBS Purchase Program, we expect to see traders taking advantage of opportunities to sell their "rate sheet influential" MBS holdings.
While we do not expect an abrupt "cheapening" in mortgage-backed security valuations (wider yield spreads), we do anticipate mortgage rates will begin to gradually rise relative to Treasury yields toward the end of March into April. This does not include the general directional guidance offered by benchmark Treasuries...more simply, if Treasury yields rise, mortgage rates will follow. READ MORE ABOUT THE MORTGAGE RATES EQUATION
Currently, the secondary market current coupon (essentially the MBS yield lenders use to derive par mortgage rates after servicing and guarantee fees) is 4.346%. The 10 year Treasury note yield is 3.672%.
Yield Spread Calculation: 4.346% - 3.672% = 67.4 basis points.
When the Federal Reserve does exit the agency MBS market, we estimate the secondary market current coupon yield spread could widen out as far as 100 basis points over the 10 year Treasury note yield (gradually, not all at once).
If the 10 year Treasury note touches 4.00% and the current coupon yield spread widens to 100 basis points, the MBS yield lenders would use to derive the par mortgage rate would be 5.00%. This is the base yield used to set mortgage rates. If 10 year Treasury yields do touch 4.00% in the months ahead, we expect the average par 30 year fixed mortgage rate to approach 5.50%. NOTE: We do not expect 10s to break 4.00% in the first half of 2010.
WHAT IS THE POTENTIAL FOR AN EXTENSION OF THE PROGRAM???
The most recent FOMC statement shed some light on the topic.
First, there was no significant change in the verbiage regarding the end of the MBS Purchase Program. Here is how the statement read:
"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month"
However, the text that followed the above statement was slightly adjusted in a manner that leaves the door open for some form of a program extension.
"The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."
Although this isn't something we haven't seen already, it's a sign that the Fed is worried about how their exit will affect mortgage rates and the fragile housing market.
The statement, "will employ its policy tools as necessary" tells me the Fed has no plans of extending the MBS Purchase Program on April 1. It does however imply, if the Fed's exit forces mortgage rates to skyrocket (which I do not expect) and housing takes a double-dip...THE FED MAY BE FORCED TO REOPEN THE MBS PURCHASE PROGRAM.
Plain and Simple: don't expect an extension of the MBS program on April 1. If anything, the Fed will let the market function on its own and evaluate progress. If the labor market is unable to create new jobs and housing takes a nose dive, then it is possible we see the Fed restart the MBS purchase program at a later date.
PS: housing stagnation, like it has over the winter months, won't be enough to force the reopening of the program. I believe it will take a full on double-dip for the Fed to reallocate funding to the agency mortgage market. This is the last thing we want though...besides the fact that remaining housing and mortgage professionals would be struggling to survive, it would send a very bearish signal and possibly evoke panic throughout the entire financial marketplace.
