Wednesday, March 03, 2010

The Fed Backed Mortgage Market

The latest weekly report on Factors Affecting Reserve Balances indicated that the Feds purchase of mortgage backed securities jumped to a total of $1.032 trillion, a whopping 1538% increase over the total of $63 billion seen last year.

Of course, we are all well aware of the Feds initiatives to prop the U.S. mortgage market so the above cited figures should come as no surprise.

What may be surprising though is the outcome of the Feds backing out of this mess as the TALF program ceases to exist later this month.

Will the Fed be able to successfully perform a hand-off of this critical market function back to the wounded and still reeling commercial/government-sponsored banking system?

Federal Reserve Bank of Kansas City President Thomas Hoenig thinks so but looking at the chart below its hard not to have doubts.

With a trillion dollar excursion into the commercial/government-sponsored mortgage market, the Fed served to temporarily backstop this massive function but the “organic” market is still very broken and far from clear of malinvestment.

I suppose we should not be surprised by additional initiatives that may be taken by Fannie and Freddie as the Fed exits but why would commercial banks re-enter a market with so much uncertainty and without a trumped-up government guarantee?