The New York Federal Reserve purchased $9.81 billion in agency MBS on Monday and Tuesday, in addition to $22.89 billion bought last week. It’s been nearly three weeks since it sold any of its MBS holdings.
Over the last couple of weeks, the Federal Reserve has slowly tapered its MBS purchases. But even with healthy MBS prices, mortgage rates remain higher than formula dictates.
A resumption in quantitative easing — at a pace that dwarfs asset purchases during the financial crisis — is just one of several Fed actions to keep credit markets functioning through the coronavirus crisis.
Since the financial crisis, the Fed’s main policy tool has been to lower interest rates by purchasing Treasuries and agency MBS. However, with rates on these securities at record lows, this strategy may no longer work.
The novelty of prepayment as a primary risk factor is one of the charms MBS have for foreign investors, particularly sophisticated institutional investors. That’s because it has a relatively low correlation factor with other assets.
If banks meet the safe harbor requirements, the FDIC won’t reclaim assets from a non-agency MBS if a bank is subsequently placed in conservatorship or receivership.