Federal Mortgage Backed Security Purchases

After the burst of the US housing bubble and the subsequent crash of financial markets in 2008, the Federal Open Market Committee (FOMC) and the Federal Reserve announced their plan to purchase agency mortgage backed securities (MBSs) at their meeting on November 25, 2008.  The stated goal of the program was “to support mortgage and housing markets and to foster improved conditions in financial markets more generally” (NY Fed).  Throughout the duration of the program from 20091Q to 20101Q, the Federal Reserve proved to provide a greater sense of financial stability within the housing markets by removing much of the risks associated with the assets backing these securities and by acting as a buyer for assets that would otherwise be impossible to sell. 

The problem of asymmetric information plaguing the mortgage markets was solved when the government offered buyers explicit insurance on these agency mortgage-backed securities and implemented conforming standards to further mitigate risks of potential default.  The Federal Reserve was able to concentrate their purchases in low-coupon 30-year securities issued by Fannie Mae and Freddie Mac.  Under a passive investment strategy, this explicit guarantee allowed the government to take these risky assets off the market; they bought and held them to their maturity.  Market participants and investors wanted assurance and security and they got it.  The question one has to consider is whether this sense of security can last, even after the Agency MBSs Purchases program has been shut down.  The program officially ended on March 31, 2010.

The purchasing of agency MBS was carried out under the Federal Reserve’s Large Scale Asset Purchases (LSAPs) program.  The LSAPs were part of the Federal Reserve’s Permanent Open Market Operations and deviated from traditional operations in the sense that the Federal Reserve was now purchasing other assets that would expand its balance sheet other than US Treasury securities that would be bought to offset forecasted future currency growth.  The Federal Reserve and the FOMC announced the initial program, which called for purchases up to $500 billion by the end of 20092Q, on November 25, 2008.  Purchases began on January 5, 2009.  A second FOMC meeting was held on March 18, 2009 that announced the expansion of the program to purchase up to $1.25 trillion in agency MBSs by year end.  A final FOMC meeting on September 23, 2009 announced that the Federal Reserve would without a doubt buy $1.25 trillion in agency MBSs and would gradually slow the pace of purchases, anticipating that the program would be complete by the end of 20101Q. Below is a graph derived from statistics released by the New York Federal Reserve portraying the amounts of weekly purchases made and how they changed in response to each of these FOMC announcements.