The Federal Reserve's role as buttress, crutch, and benefactor of the nation's mortgage debt market came to an end Wednesday. Since November 2008, the central bank has been the market's No. 1 patron, buying up $1.25 trillion in mortgage-backed securities (MBS) from Fannie Mae, Freddie Mac, and Ginnie Mae.
[IMAGE]There's been chatter that the Fed's exit could leave a gaping hole in the secondary market for mortgage bonds, causing interest rates for home loans to spike and buyer demand to dwindle. But the central bank has been prepping the market for its absence for some time now in the hopes of diminishing such effects and has indicated that it will be keeping a close eye on market reactions, hinting that it could step back in if conditions begin to falter.
Most market observers, though, are predicting that won't be necessary. It appears that private investors' appetites for agencies' mortgage bonds are piquing. Analysts are
[COLUMN_BREAK]saying private equity will step in to pick up the slack and mortgage interest rates will rise less than a quarter of a percentage point over the next quarter.
It's expected that there will be some price volatility in the mortgage securities space after the Fed's withdrawal, but analysts don't expect prices to plunge or issuers' yields to start heading upwards. One reason for this assumption is that traditional MBS buyers now have money to burn.
Christian Cooper, an interest rate strategist at Royal Bank of Canada's RBC Capital Markets, explained to _American Banker_, ""As the [U.S.] government has become the world's largest buyer of mortgage securities in the last year, they've effectively squeezed all other buyers out of the market. The natural mortgage-backed securities buyer has been accumulating cash, effectively waiting for the program to end.""
Economists also say that Fannie Mae and Freddie Mac's decision to pull seriously delinquent loans from securitized pools, which they announced in February, is making the prospect of purchasing such bonds more appealing to investors. Over the next few months, the GSEs plan to buy back loans in MBS that are 120 days or more overdue â€" some $127 billion in loans for Fannie, and $70 billion for Freddie.
_The New York Times_ noted that while the mortgage market appears to be taking the end of the Federal Reserve's MBS buying in stride, any talk from the central bank about actually selling its recently-acquired holdings should be a cause for greater concern than the Fed simply ending further purchases, since the Fed now owns about 25 percent of the outstanding stock of mortgage bonds.