Federal Reserve Still Buying Mortgage Backed Securities at Fevered Rate

Posted by Ray on October 8, 2009 under Main | Be the First to Comment

While the Fed has continually said it is going to slow down its purchases of mortgage backed securities and eventually stop altogether sometime in the near future, it is not. During the first week of October the New York Fed reported that it has purchased another $20B worth of these securities which is driving mortgage rates down to 4.87%.

The Fed has said it will be stopping this program or slowing it down, but it certainly does not look like it to me. It is also clear that without the Fed’s intervention and the tax credit the housing market would be DOA, which is not a good sign for what CNBC has called a robust economic recovery. The FHA is in trouble and is reported to need, sometime in the future, a $54B bailout unless it raises its down payment minimum from 3.5% to 5%, what a stretch, but the FHA says this is unnecessary.

Something just doesn’t sit right with this situation. Clearly the Fed is doing something against what it has publically stated and one of the big issues I have is how bad are these mortgage backed securities? As many of you know, the Fed is not legally allowed to take credit risk, so are they knowingly buying bad debt with these mortgage backed securities with all the bailout reports coming out? Not only that, but with all of these off balance sheet items, what’s on them and what else are they taking for collateral? Is there more credit risk that we don’t know about?

If we have one question about what the Fed is doing that is simply one question too many. They publicly stated they will slow down mortgage backed security purchases and here we see they are keeping essentially the same velocity of buying. What is going on? Audit the Federal Reserve already, enough is enough! View the New York mortgage backed securities transactions HERE