Fed Underwater on Mortgage Bond Puchases?

by Alex Stenback on January 30, 2009

Interesting morsel from John Jansen at Across the Curve:

The Federal Reserve has purchased several hunded billion mortgages and is significantly underwater for all its efforts. They have bought big chunks of FNMA 4s between 100 and 101. Those bonds currently trade around 99.

This would indicate a paper loss of something like 3 Billion.  Granted, it’s a paper loss, and 3 Billion now qualifies as chump change, but I doubt higher mortgage rates and multi-billion dollar losses is what the Fed was hoping for by purchasing mortgage bonds.

{ 2 comments… read them below or add one }

Aaron Dickinson - Edina Realty February 1, 2009 at 9:44 am

If I remember correctly from other stories I’ve heard, the Fed is looking at these assets as long-term holds since many of these assets today are not attractive to investors but will likely be more so in the future. Am I correct on this or on the wrong track?

Alex Stenback February 2, 2009 at 1:07 pm

This is really more about the Fed’s ability to influence mortgage rates than it is about the Fed buying an asset that might be undervalued by the marketplace and will recoup – that’s for the bad assets on the books at banks.

The lesson here is that it takes more than $500 billion and the will to spend it to lower mortgage rates permanently, so take any “lets make mortgage rates 4%” talk with skepticism. Unless we are talking about Uncle Sam simply issuing and retaining mortgages, which is very different than what they are currently doing in buying mortgage backed securities, forcing interest rates lower, AND having them stay there, is a real trick.

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