Banks make Mortgage loans (originations) and then bundle them up and sell them to get more money to lend. Most of this ends up in huge pools which are sold as Mortgage Backed Securities (MBS). Back when the last financial crisis occured it was largely because these type of bundled debt instruments started failing and they became Kryptonite which investors wouldn't touch anymore.
So the market wouldn't collapse The Federal Reserve stepped in and became the buyer of these MBS to prevent a bottleneck where consumers couldn't get mortgages because there were no funds. Through 2018 the Fed bought huge amounts of MBS:
Then in 2018 they stopped because investors confidence had changed and they were buying again. Now we have another credit crisis due to Coronavirus panic and other financial issues, and the Fed has stepped in again. As an emergency measure Fed Chairman Powell announced dropping interest rates to close to zero and that the Fed would be purchasing $200 billion in MBS:
That's about 2.6% of the $7.5 trillion market. How much liquidity is that really going to provide if everyone else stops buying?
"Mortgage Originations Hit Post-Crisis High in 2019
January 23, 2020John Bancroft
Lenders generated a hefty $2.375 trillion of first-lien home loans last year, the strongest the market’s been since 2006. Volume was up 8% from the third to the fourth quarter, but not all lenders took advantage of the refi wave."
So $200 billion represents about 1 month of new mortgage generations. Is the Fed prepared to do this every month? If not, where is the money going to come from for new mortgage originations?
So the market wouldn't collapse The Federal Reserve stepped in and became the buyer of these MBS to prevent a bottleneck where consumers couldn't get mortgages because there were no funds. Through 2018 the Fed bought huge amounts of MBS:
Mortgage-backed securities held by the Federal Reserve: All Maturities (DISCONTINUED)
Graph and download economic data for Mortgage-backed securities held by the Federal Reserve: All Maturities (DISCONTINUED) (MBST) from 2002-12-18 to 2018-06-13 about mortgage-backed, maturity, securities, and USA.
fred.stlouisfed.org
Then in 2018 they stopped because investors confidence had changed and they were buying again. Now we have another credit crisis due to Coronavirus panic and other financial issues, and the Fed has stepped in again. As an emergency measure Fed Chairman Powell announced dropping interest rates to close to zero and that the Fed would be purchasing $200 billion in MBS:
Fed cuts interest rate to near-zero, moves to prop up mortgage market - The Real Deal
Acknowledging that the full scope of the coronavirus pandemic’s impact on the economy is unknowable, Federal Reserve Chairman Jerome Powell on Sunday night said the Fed is willing to be patient as it cuts interest rates. In the most drastic actions since the 2008 financial crisis, the Federal...
therealdeal.com
That's about 2.6% of the $7.5 trillion market. How much liquidity is that really going to provide if everyone else stops buying?
Mortgage Originations Hit Post-Crisis High in 2019
Lenders generated a hefty $2.375 trillion of first-lien home loans last year, the strongest the market’s been since 2006. Volume was up 8% from the third to the fourth quarter, but not all lenders took advantage of the refi wave. (Includes two data charts.)
www.insidemortgagefinance.com
"Mortgage Originations Hit Post-Crisis High in 2019
January 23, 2020John Bancroft
Lenders generated a hefty $2.375 trillion of first-lien home loans last year, the strongest the market’s been since 2006. Volume was up 8% from the third to the fourth quarter, but not all lenders took advantage of the refi wave."
So $200 billion represents about 1 month of new mortgage generations. Is the Fed prepared to do this every month? If not, where is the money going to come from for new mortgage originations?