There were three interesting articles recently on Bloomberg, all speculating on MBS purchases by the Federal Reserve.
First there’s the case for "Maybe they will" today:
Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world’s biggest Treasury investors.
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. While purchasing the some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.
The Fed denied the possibility a few days ago:
A Federal Reserve official denied a newspaper report that the Fed is in talks with foreign central banks about the feasibility of using taxpayer money to buy mortgage-backed securities.
The Financial Times reported today that the discussions among officials at the Fed, the Bank of England and the European Central Bank are part of broader talks about how to ease turmoil in global financial markets. The newspaper didn’t say where it got the information.
The Federal Reserve has already taken steps to stabilize the market for mortgage-backed securities and provide liquidity to financial institutions.
The Bank of England said it’s in discussions with other central banks about how to “ease the strains” in financial markets, although it’s not considering requiring taxpayers to assume credit risks.
Britain’s central bank said it is “not among” those that the Financial Times reported earlier today were contemplating the purchase of mortgage-backed securities to smooth lending to consumers after a worldwide surge in borrowing costs. The Federal Reserve also denied it’s in discussions to buy such debt.
“We have been examining a number of other options, but it is too early to go into any detail,” the London-based Bank of England said in a statement. “The bank is not among those reported today to be proposing schemes that would require the taxpayer rather than banks to assume the credit risk.”
So how likely is the Fed to purchase mortgage securities?
``In a sense they’ve done that already with Bear Stearns,” Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments, said of the government taking on the risk of owning mortgage securities. “This was not just a temporary situation. The process has begun, the question is how far can it go?”
How far indeed?
Yep, that’ll help. Checking out HUD auctions in Houston last year, the homes I saw had sat empty for close to a year before coming up for auction. More than half had been vandalized. How does a Federal Agency handling the coming foreclosures help stabilize prices? The longer they sit the more they create blight, the faster they sell the steeper the price drop.
Igor says tragedy