The Fed’s $2.7 Trillion Mortgage Problem

If you took out a mortgage over the last couple of years, there’s a good chance the holder of that loan is America’s central bank — a consequence of its monetary stimulus efforts throughout the pandemic.

Why it matters: The Fed will face a series of political and economic headaches as it attempts to move away from subsidizing home lending by shrinking its portfolio of mortgage-backed securities.

The problem: Extracting itself from this market risks crashing the housing industry and creating intense political blowback for incurring financial losses.
By the numbers: Back in February 2020, the Fed owned $1.4 trillion in mortgage-backed securities, and the number was falling rapidly. But when the pandemic took hold, the central bank began a new round of bond purchases (known as “quantitative easing”), swelling that number to $2.7 trillion.

The policy contributed to ultra-low mortgage rates that stimulated home buying and refinancing activity until recently.
State of play: Now, as the Fed seeks to tighten monetary policy to combat inflation, it wants to shrink that portfolio. It may turn out to be easier said than done.

The Fed says that by September it will reduce the mortgage portfolio by up to $35 billion per month. Emphasis on “up to.”

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Source: Axios