By The Federal Reserve Board may be the least understood institution in America and about which people know the least. But in these trying times, their role has not only been big. It’s been critical. The Fed has probably done more to get the economy moving again than all the government spending and bailout programs combined.
About 85% of all mortgages made today are being put into mortgage backed securities. These securities are being created primary by Fannie Mae and Freddie Mac. Both of which are now 80% owned by the government. In past, these securities were bought by banks, mutual funds, insurance companies and pension funds. These same investors are still buying, but in general, they are buying a whole lot less than they did before the credit crunch of 2008-09.
In order to drive rates lower, the Fed has stepped in and been buying massive amounts of mortgage securities. As a matter of simple supply and demand, massive buying will drive bond prices up, and as bonds prices rise, rates drop. Thus, the Fed made a conscious decision to buy mortgage securities to drive mortgages rates downward, largely to keep pressure off the American homebuyers and to stimulate housing markets in general.
The Fed has stepped in as the buyer of last resort, and they are now authorized to buy up to $1.2 trillion in these MBS’s. They’ve already bought $975 billion, with $225 billion more to be bought.
They have been buying at a rate of $25 billion a week; just enough to keep rates relatively low, allowing people to refinance at lower rates and for homebuyers to afford new homes.
