Fact Check: Does The Federal Reserve Own 21 Percent Of All Mortgage Bonds, Fueling Housing Inflation, Bubble?

Fact Check: Does The Federal Reserve Own 21 Percent Of All Mortgage Bonds, Fueling Housing Inflation, Bubble?

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By September 2020, the Federal Reserve owned almost a third of mortgage bonds backed by home loans in the U.S. after going on a record-setting buying spree as the central bank tried to soften the impact of the Covid-19 recession on homeowners.

In an effort to calm fears of a wave of imminent foreclosures that happened in 2008, the Fed in March and April of 2020 bought around $600 billion of bonds backed by home loans. It continued buying about $100 billion more each month at least through September, Bloomberg reported. Buying the securities pushed mortgage rates lower, with the average 30-year rate falling to 2.91 percent in September compared to 3.3 percent in February 2020.

The current monthly pace of purchasing is $40 billion of mortgage-backed securities, Reuters reported. The Fed sees it as an “effective” way to hold down rates and provide certainty to markets, Fed Governor Lael Brainard said on June 1, 2021 during a virtual conversation held by the Economic Club of New York. Brainard was responding to a question about whether the central bank should be purchasing mortgage bonds at a time when the housing market is performing strongly.

The pandemic helped usher in skyrocketing home prices and record low 30-year mortgage rates. That allowed homeowners to refinance their mortgages, cutting their monthly loan payments and also helped people buy homes. But with the Fed owning so many U.S. home loans, it has unusually high power over setting mortgage rates.

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Between September 2012 and October 2014, the Fed owned 34 percent of the market during a quantitative easing program known as QE3, Bloomberg reported. Principal payments from its mortgage bond holdings whittled that down to 21 percent, but that increased back to 30 percent by the fall of 2020. Morgan Stanley analysts said the Fed was on track to again own 34 percent of the mortgage universe by the end of 2020.

Some analysts think Fed officials should start considering an adjustment to the government’s asset purchase program to make for smoother market functioning in key segments of the U.S. debt markets, particularly if demand for new U.S. home loans cools, Marketwatch reported.

The Fed’s purchase of mortgage bonds helped fuel the growth of the mortgage-backed securities market, which finances the majority of the U.S. single-family home loans outstanding. 

mortgage-backed security (MBS) is a pool of home loans, often packaged by agencies Fannie Mae, Freddie Mac or Ginnie Mae and sold on the open bond market to investors. The investors who buy the securities are paid monthly when homeowners make their principal and interest payments.

Investors have certainty in their investments, according to Quicken Loans. The majority of mortgages are backed by the U.S. government, either directly or indirectly. FHA Loans and VA Loans have direct government guarantees and are sold into the bond market by Ginnie Mae. Fannie Mae and Freddie Mac are government-sponsored entities.

The Federal Reserve is buying $40 billion worth of agency MBS every month in order to support the housing market. It has a vested interest in the U.S. housing industry succeeding. Housing spending, including rent and utility payments, makes up almost 15 percent of the U.S. gross domestic product (GDP).  

Moving short-term interest rates down to near 0 percent only drove mortgage rates down so far. In order to drive borrowing costs even lower, the Federal Reserve in recent years entered the market for mortgage bonds.

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As of May 27, the Federal Reserve owned $2,273 trillion in mortgage-backed securities, according to a Federal Reserve statistical release. It was supposed to be an emergency measure to support the economy during the covid-19 pandemic. Fed Chairman Jerome Powell said that the health of the mortgage and housing industry is the “strongest housing market that we have seen since the global financial crisis.”

“I would say that before the pandemic, it was a very different housing market than it was before 2008,” Powell said. “So we don’t have that risk of a housing bubble where people are overleveraged and owning a lot of houses.”

Powell acknowledged that home prices are rising and buyers are experiencing limited inventory. The National Association of Homebuilders reported in April that the average price of a single-family home increased by nearly $36,000, thanks, in part, to lumber prices tripling in the previous 12 months, 

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