Friday, March 19, 2010

The End of the MBS Program

One move from the Federal Reserve that hasn't gotten a lot of notice among the discussion over whether to raise interest rates is its decision to end its mortgage-backed securities purchasing program this month. The Fed has bought $1.25 trillion in MBS since it started this program last year, but has been gradually cutting back in preparation for getting out of this business.

No one quite knows what the repercussions of this exit will be, but the hope is that the market for mortgages has stabilized enough that the effects will be small. Mortgage-backed securities, remember, were one of the key drivers of the real estate collapse; when lenders could turn any kinds of mortgages into securities - almost always given AAA ratings - and sell them off to unwary investors, they had a great incentive to sell as many mortgages as possible, with little concern for whether they'd ever be paid back. In large part, it's the securitized versions of these subprime mortgages that the Fed has been soaking up over the past year.

Banks have now, of course, become much more prudent about the types of mortgages they're willing to offer. Moving forward, mortgage-backed securities should be a much stronger investment vehicle, and the Fed is hoping these securities will be snapped up by money managers and other investors.

If that's the case, the end of the MBS purchase program will be no more than a blip. Then the bigger question will come when the Fed starts trying to unload that $1.25 trillion in inferior mortgages.

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