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How the Fed Props Up an Overheated Housing Market in Three Pictures

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20 comments on How the Fed Props Up an Overheated Housing Market in Three Pictures

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According to the Federal Reserve Statistical Release are about $8.5 trillion factoring in reverse repos (a subtraction). 

Recall that the Fed has been adding $120 billion a month in QE to its balance sheet. $80 billion of that is treasuries and $40 billion is mortgage related.

Via Reverse Repos, the Fed has lopped about $1.3 billion from its balance sheet as of September 22.

Key Items – Millions of Dollars

  • US Treasuries: $5,434,876
  • Mortgage Backed Securities: $2,558,958
  • Reverse Repos $1,359,680

Fed’s Balance Sheet by Duration

Inclusions and Exclusions

  • The above chart shows time-sensitive assets only. 
  • “All” includes minor loan balances that are time sensitive but not shown in other charts above.
  • The chart does not include other Fed assets such as foreign currency swaps, gold, and non-time denominated assets. 

Changes in the Fed’s Balance Sheet by Duration

That is the key chart in the series. It compares September 15 to September 22.

Importantly, in a single week the Fed added $22 billion in mortgage backed securities, nearly all of which had a duration of 10 years or longer. 

This is an ongoing process despite major subtractions via reverse repos.

In the process, the Fed gooses housing by extending the duration of the assets it does hold, effectively lowering long-term interest rates in the process.

The above charts sho changes from September 15 to September 22. There will be new numbers out later today and I will take another look at Wednesday-to-Wednesday changes. 

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Mike Shedlock

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20 Comments
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bobcalderone
bobcalderone
4 years ago
Mish, everyone says this Fed-driven madness has to end — but does it? What if we get a black swan event, and the Fed, PBOC, ECB, And DOJ throw their combined resources against it? Can the world’s 4 largest central banks do whatever they want, as long as they work together in a time of crisis?
I tend to think they can. Just as there was the saying “Never pick a fight with anyone who buys ink by the barrel and paper by the ton”, when it comes to a financial crisis, “Never pick a fight with anyone who can create money with a few keystrokes on a computer.” Your thoughts?
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honestcreditguy
honestcreditguy
4 years ago
this didnt help either, potter won, no angels jumping off bridge into cold water with ya….
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Felix_Mish
Felix_Mish
4 years ago
“Duration” in these graphs: Is a 30 year loan that’s in its 28th year a 30 year or 2 year loan?
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TexasTim65
TexasTim65
4 years ago
Mish (or anyone)
Are they buying MBS’s directly from the banks/Investors or are these just the mortgages added from Phoney and Fraudy?
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Eddie_T
Eddie_T
4 years ago
Reply to  TexasTim65
Sounds like they mostly buy new agency issues.
“Agency MBS purchases will likely be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market because these securities have greater liquidity and are closely tied to primary mortgage rates. The Desk may purchase other agency MBS if market conditions warrant. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for purchase. These eligible assets include, but are not limited to, 30-year and 15-year securities of these issuers. Ineligible assets include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents.”
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TexasTim65
TexasTim65
4 years ago
Reply to  Eddie_T
So it is just Phony-Mae and Fraudie-Mac (plus Ginnie) they are purchasing then.
Essentially just 1 government agency buying from another. Phony and Fraudie should have been closed up in 2008.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  TexasTim65
Big Banks Gotta Eat.
NYFRB buys on open market via auction process from approved counterparties.  The spread guarantees free money for Wall Street.
How will agency MBS purchases be conducted?
The Desk will conduct purchases of agency MBS via FedTrade, the Desk’s proprietary trading system. FedTrade operations will be conducted using multiple-price, competitive auctions with approved counterparties.
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Eddie_T
Eddie_T
4 years ago
Reply to  Tony Bennett
Isn’t it true that all the big banks now hold far more MBS’s on their books than they did , historically speaking? Why is that?
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Eddie_T
loans —> risk
mbs —> no risk
commercial loan growth big banks anemic.  Much easier to make profit trading and holding govt securities.
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Eddie_T
Eddie_T
4 years ago
Thank you so much Mish……I knew there was something about the reverse repos that mattered in a way that wasn’t being talked about…..I have been reading and trying so hard to get a handle on it, but I just didn’t have the chops to figure it out.
Now everything is illuminated . Makes perfect sense.
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RonJ
RonJ
4 years ago
“A deep dive into changes in the Fed’s balance sheet show it is purposely goosing housing.”
A previous local political ad for rent control: “…because the rent is too damn high.” 
“California legislature proposes the state pay for, and own, up to 45 percent of a home, ‘allowing more families to buy homes’”
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Six000mileyear
Six000mileyear
4 years ago
Reply to  RonJ
How Orwellian!
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Tony Bennett
Tony Bennett
4 years ago
“Mortgage Backed Securities: $2,558,958”
…
THIS is why the Federal Reserve needs a true INDEPENDENT audit.
Following the last recession when Bernanke chose to start buying GSE mbs there was nary a word on any losses.
There was so much dreck (no doc / liar loans) in GSE mortgages … but when Federal Reserve stepped in the losses magically disappeared.  The Federal Reserve has a quarterly financial report, but it reports only “net” for income gain re mbs.  With different maturities / interest rates it is impossible to know true picture.  Now a lot of those mortgages were performing and covering the sins of others (especially in those early years) but hiding behind “net” we’ll never know.
It is my contention that in those early years Federal Reserve hid a lot of losses (especially 2009 / 2010 when the big banks made concerted effort to convert as many private label mortgages as possible to agency for taxpayer to absorb the loss if  taken) that improperly boosted home prices.
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StukiMoi
StukiMoi
4 years ago
Reply to  Tony Bennett
“THIS is why the Federal Reserve needs a true INDEPENDENT audit.”
And pray, tell: Who would the independents be?
The Fed needs a nuclear bomb. Then another one, just in case.
They never have, never will serve ANY other purpose than stealing from productive people for the benefit of deadweight leeches. It doesn’t matter what they do: They will literally, with 100% certainty, never do anything other than steal for the benefit of those least competent at deploying the assets stolen for them. Simply because there is nothing else they can do, even if they in some weird alternaverse wanted to.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  StukiMoi
“And pray, tell: Who would the independents be?”
…
… next thing you’ll tell me is that the Easter Bunny doesn’t exist …
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KS Farm Boy
KS Farm Boy
4 years ago
Reply to  StukiMoi
The banking industry owns and controls the Federal Reserve.
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StukiMoi
StukiMoi
4 years ago
Reply to  KS Farm Boy
So, a third, or tenth, or hundredth nuclear bomb, then. As many as required to get rid if it all.
It makes no difference who “owns it.” It’s a pure cancer. Getting rid of it, as well as any and all which may be a trace of it, and any and all which may support it and provide it sustenance, is all that matters. At any cost. No yabuts nor any other childish drivel. Just get rid of. Period.
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Siliconguy
Siliconguy
4 years ago
Reply to  Tony Bennett
If the Fed lost money on a MBS, they would just offset the loss with a profit on a different one, or if they didn’t work, print a bit more to break even. They don’t have to turn a profit. 
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KidHorn
KidHorn
4 years ago
The FED has been propping up the housing market since 2008. There’s no way mortgage lenders would lend at anywhere close to current rates unless they knew the FED would end up owning the mortgage.
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TexasTim65
TexasTim65
4 years ago
Reply to  KidHorn
Since well before 2008.
As soon as banks were able to create MBS’s (mortgage backed securities) and sell them to investors. At that point banks no longer were on the hook so they just collected fees for mortgage documents/loans. That’s how housing crisis 1 was able to happen.
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