By Ramsey Su
It has been 58 weeks since Bernanke launched QE3. Pertaining to the purchase of RMBS, here are the numbers, as of October 30, 2013:
- Total purchase in 58 weeks: $916.9 billion
- 2013 YTD purchases: $692.3 billion
- Average per week: $15.8 billion
- Annualized based on average: $821.6 billion
The Mortgage Bankers Association is projecting $1.7 trillion of mortgage originations in 2013, with $661 billion in purchase loans and $1.08 trillion in refinances.
For 2014, the MBA is estimating that purchase loans will increase to $723 billion while refinances will drop dramatically to $463 billion, bringing the total to $1.2 trillion.
The Federal Reserve is only purchasing agency MBS, which are primarily consisting of Freddie (OTCQB:FMCC) and Fannie (OTCQB:FNMA) loans. In recent years, the agencies have been commanding a market share of about 90% of all mortgages while they had not much more than 50% in more normal years, if there is a definition of normal. If the agencies continue to dominate 90% of the secondary market, or $1.08 trillion in 2014, the Fed would be buying 76% of all agency loan originations. If for whatever reason the market share of agency loans were to return to normal, the Fed would be purchasing not only all originations, it would also be buying existing MBS from current investors. Is that a sound policy?
The agencies have been under the conservatorship of the Treasury for five years. At the moment, there exists a GSE reform bill authored by Corker and Warner. Its status is unknown. This bill heads in the direction of privatizing the agencies. If it is passed, there will be no more agency MBS for the Fed to buy, rendering QE3 useless.
On the other extreme, Obama has nominated Mel Watts as the director of FHFA, the agency that oversees Freddie and Fannie. Presumably, the director will lead the agencies out of conservatorship. Watts supposedly favors continuing the government's role in the secondary market, and to include principal reduction as a remedy for borrowers in default. If Watts is confirmed and indeed converts the agencies into free mortgages for all, then there is no need for Mortgage Backed Securities, one might just as well roll them all into generic Treasuries, backed by the U.S. government. After all, a mortgage would no longer be a loan, it would be an entitlement.
The reality is that the Fed has exhausted all strategies. The following chart shows the results of never ending Fed accommodations since Volcker, the last Fed chairman who had a spine. There is a limit to how low mortgage rates can go and we have clearly hit bottom.
30-year fixed mortgage rates since 1975.
In summary, it is unclear what the Fed is trying to accomplish by purchasing these massive amounts of agency MBS. If the intent is to inflate another bubble, have they not learned the lessons from the dotcom, the sub-prime and the credit bubbles? Each time a bubble bursts, the consequences are more dire. I look forward to watching how Ms. Yellen, or whoever, will go about pulling yet another rabbit out of the hat.
Chart by: Mortgage Daily News