RCA in the commercial property press:

The Fed and MBS: An End in Sight

The Commercial Observer reports: Residential mortgage rates are inching up. Freddie Mac reported on Thursday that rates for 30-year fixed-rate conforming mortgages had climbed to an eight-month high of 5.21 percent, up from 5.08 percent a week earlier and a low of 4.71 percent last December. Because conditions in the housing market remain fragile, the rise in borrowing costs is of serious concern for policy makers and for a range of market participants, who have come to expect low financing costs to offset the prevailing woes of the housing sector.

The current rate increases coincide with the Federal Reserve's anticipated winding down of its purchases of residential mortgage-backed securities (MBS). The Fed's purchases of MBS issued by Fannie Mae and Freddie Mac have been a keystone of the government's program to support the housing market. The program was first announced in November 2008, a few months after the Federal Housing Finance Administration placed the government-sponsored enterprises into conservatorship under the authority of the Housing and Economic Recovery Act. The first purchases of agency MBS followed two months later, in January 2009, and reached just under $1.25 trillion as of last week.

The Fed's investments have been financed through the creation of new bank reserves and have fueled the swelling of the Fed's balance sheet. As of last week, agency MBS represented 46.7 percent of the Fed's $2.3 trillion in assets. In a relatively short time, the Fed has grown from a neophyte investor to the market's dominant player and the owner of more than one in five agency MBS dollars outstanding.

The importance of the MBS market follows from the dependence of the domestic housing finance system on the participation of the government-sponsored enterprises. It was not always so.

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Posted by: Nina Turner

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