The Federal Reserve announced this week that it is going to wind down its program to purchase $1.5 Trillion worth of mortgage backed securities.
“I don’t think there are enough private buyers to replace the central bank,” said Sung Won Sohn, professor of economics at California State University. “If there is even an inkling that the Fed is going to start selling by 2010, we would see mortgage rates go up right away.”
People are right to be concerned about the Fed trying to sell any of that massive pile of overpriced securities. But that isn't the only reason to doubt the Fed's ability to wind down this program.
Chris Martenson did some simple math and found something interesting.
So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.
Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:
That is, a total of ~$686 billion in new mortgages were issued in 2009 (through August).
Now let's look at how many Mortgage Backed Securities (MBS) and agency debt obligations were accumulated by the Federal Reserve on its balance sheet over the same period of 2009:
It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.
In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.
This is a HUGE problem. Even if Martenson's numbers are off by several percent the fact remains that the Fed is the only serious buyer of mortgage-backed securities out there. If it tried to unload even a small percentage of them it would swamp the market. It couldn't unload them even if it offered them at a discount.
What's more, if the Fed tried to sell the MBS it would drive mortgage rates up so far that the housing market would completely freeze up.
The Fed has purchased many of these MBS at near face-value. With foreclosures and delinquencies rising, it appears that the Fed is going to be taking massive losses to its portfolio.