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Federal Reserve Buys More Than 100% of Mortgages Issued in 2009

Monday, September 28, 2009, 10:13 AM

What follows is a snippet from the most recent Martenson Report (Housing and Wealth: Part II).


This is important information.  What I've found and present below is that the Federal Reserve is not just supporting the housing market, it is the housing market.

Just as important as a person's desire to buy a home is their ability to gain access to mortgage funding.

The mortgage market is a gigantic beast with many moving parts, but it is pretty easy to understand from a high level.

The process works like this:  A homeowner secures a mortgage from a bank or mortgage company.  Then the mortgage is sold off to another company, with the cash generated by that sale now available to lend to other potential homeowners.  Ultimately the mortgage may pass through several sets of hands but ultimately it lands with a terminal holder.

In that chain, the mortgage might get sold off several times, or perhaps sliced and diced by Wall Street wizards, but all that matters is that some company (with cash) is there at the end to buy the mortgage to keep the whole chain moving along.

Lately, the "terminal buyers" in that chain have increasingly ended up being the federal government (through the GSEs) and the Federal Reserve.

And not just by a little bit, but by a lot.

Here are the numbers:

So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.

Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:

That is, a total of ~$686 billion in new mortgages were issued in 2009 (through August).

Now let's look at how many Mortgage Backed Securities (MBS) and agency debt obligations were accumulated by the Federal Reserve on its balance sheet over the same period of 2009:

(Source)

It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.

In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued.  So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.

That's not a free housing market; that's a market bought, owned, and sustained by the Federal Reserve's willingness to print up three quarters of a trillion dollars out of thin air.

While the individual mortgages issued in 2009 may or may not be the exact same ones purchased by the Federal Reserve, that's immaterial.  All the mortgage issuers care about is that when they issue a mortgage, a purchaser with money exists somewhere down the line.  The chain needs a terminal buyer, and that buyer has become the Federal Reserve.

The impact of these purchases by the Federal Reserve is to both provide liquidity and to drive down the rate of interest for new mortgages.  By lowering both the long end of the Treasury curve (which the Fed does by actively buying Treasuries) and providing more than sufficient demand for MBS and agency paper, long-term interest rates come down.

Without the Fed's activities, it is a rock-solid certainty that mortgage interest rates would be higher than they are, and possibly a LOT higher.

What all this means is that when (not if) the Federal Reserve begins to try and unwind itself from all of the magnificent interventions of the past year, it must contend with the fact that it is the housing market.

Where the Fed is hoping that it can gently release the soft chubby fingers of the housing market, which will then toddle off under its own power, it will discover that it is actually carrying a helpless newborn.


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24 Comments

robk's picture
robk
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Thanks, Chris.

Don't forget that in addition to the homes being sold, there are a ton of people refinancing their mortgages at these low rates.  So although the Fed number adds up to more than the number of home sales, it is still just a part of the total mortgages being originated.

Keep up the great work!

Rob

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Hello Chris.  Is it possible that the government is using the ESF to trade our gold reserves so that we don't even need to print money?

http://www.usagold.com/gildedopinion/turkesfgold.html

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Robk,

of course I agree with you that the refi market is another part of what is traditionally viewed as "the mortgage market," but a refi does not impact housing demand either up or down, it is merely an existing mortgage renegotiated.  I view refis as a form of churning.

I focus on purchase applications because that's where the action is, at least with respect to the sort of activity that could lead to a shift in house prices.

Cheers,

Chris

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EndGamePlayer
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Wow Chris - These last few reports have been just mind-boggling, eye-opening and thought provoking.  I kinda had a feeling it would be a while before "things returned to normal" but to put this into such clear vision of what lies ahead on that path to recovery - well you've made my arguement for me. Thanks for your insight! . . . and excuse me while I go to the corner and meditate . . .EGP

Johnny Oxygen's picture
Johnny Oxygen
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

I have two things to say:

1. Holy Cats!

2. I hope its a least 6 more months before CNN catches on to what's happening because I still have lots more silver to buy.

Nichoman's picture
Nichoman
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

With the government artificially propping up so many segments of society in an unsustainable manner.  

What does this say about what will happen to our government(s)?  Does the obvious need to be stated?

Nichoman

RedShift's picture
RedShift
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Is Freddie Mac Quietly Purchasing Mortgages?

Wells Fargo just sold our mortgage to Freddy Mac.  I wonder why.

I also wonder how many others have experienced the same.

The letter, dated September 21, 2009, begins:

"The purpose of this notice is to inform you that your mortgage loan was sold to Freddie Mac or to Freddie Mac as  trustee for a trust holding your mortgage loan on August 27, 2009.  Selling mortgages to Freddie Mac is a standard part of the mortgage business for many of the nation's mortgage lenders. ... The transfer of ownership of your mortgage loan has not been publically recorded."

A  "standard part"... oh really?!?  Was any of that imaginary FED money given to Wells Fargo in this transaction?

Also, WHY was the transaction NOT publically recorded?  Are they hiding something from the Chinese or Japonese creditors and lenders?

Note: this was not a typo:  "to Freddie Mac or to Freddie Mac" - that's exactly the way it was printed.

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Chris,

This is amazing work.

The question I have though is that what are hte consequences of a government-owned mortgage market? When they own all the mortgages, what happens?

Here's what I got: for deliquent mortgages, the government won't be making any money -- this means that on all the "investments" that the Fed has made in legacy (a.k.a. toxic, a.k.a. failed) assets, they won't be getting any returns. So eventually there'll be some further public outcry on the fact that the government has made long-term investments in mortgages (usually 30-year financial products) which will be proven to be overvalued and underperforming.

I recognize that government control of the mortgage market should be an issue of concern, but other than taxpayer money being funnelled into overvalued, underperforming MBSs, what effect does this action have on interest rates, housing markets, and the economy in a more macro- sense?

dsaxey's picture
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Just a thought, if the federal government is now the terminal buyer of a majority of the mortgage debt in the US.  Are mortgages held by Fannie Mae / Freddy Mac considered federally subsidized debt?  The classification of this debt is extremely critical as it can lead to the financial enslavement of persons to the state. 

Currently during a BK an individual can “write-off” all debts but two types: tax debt (federal, state, & local).  Second is federally subsidized debt like student loans.  If the mortgage notes at some point become classified as federally subsidized debt and the housing market completely implodes driving home prices to nothing the future would be a person losing their home, with no way to get a “fresh start”.  This would create a population of millions who will become indentured financial servants to the state.  I know it seems out there now, but so was spending trillions in a 6 month period just 1 year ago.  Please reply and let me know if I am way off base.

Dave

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Chris

Surely the situation is actually much worse than even you say.

The $686bn of existing and new home sales would include many cash purchasers.  About 40% of homeowners have no mortgages.  OK this is partly because some folks pay off their mortgages eventually, but others buy for cash, and have never had a mortgage.

Anecdotally from Davos' blog there have been many more purchases at the bottom end of the market

(sub $100k and sub $150k) undertaken by speculators.

Thus the Fed have not just been buying up (an amount equivalent to) all new mortgages, but a chunk of the refis also.

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

I guess I fail to understand what difference it makes in the game of musical chairs fiat WHO ends up holding the actual mortgage paper.

I walk into a local bank for a mortgage, that bank under the current rules is allowed to lend 90% or so more than they actually have in cash reserves, so in effect, the "money" that is paid to the current owner of the house for my mortgage was created right then and there as a bookkepping entry. 

The local bank is limited in the number of times they can do this, by the amount of reserves they have, so most of them sell the mortgage off to one of the GSEs ( Fannie, Freddie ) and just retain the servicing rights (you send your payment to the local bank ) for small cut of the pie.  Also, this is an incentive to the local bank to write "liar loans" that they know already will be trouble down the road....so why not take a small cut, sell the paper on up the line rather than retain it and have to deal with a foreclosure later.

The GSE does the same thing.....creates the money they send to the local bank out of thin air.....which all worked fine as long as long as the ENOUGH of the homeowners at the bottom of the food chain actually paid their mortgages....so when thr number that did not exceeded some figure, the GSEs had trouble juggling the required number of balls in the air.....so another FINO ( Federal In Name Only ) agency, the FED, steps in, and takes over the circus act.

So what ?    There is no actual "cash" required along the way, unless the mortgage is sold ( either bundled by Wall St, or individually ) to an investor who really DOES have to have some cash to buy it......and for years, the GSEs have been the giant "buyers" the way I understand things....so again, what does it matter that the FED is now the one hiding the pea under the shell ?

The  ENTIRE fiat system is one huge joke on the guy at the bottom of the pile....you know, the one that actually has to go work, sweat, farm, mine, somehow produce ACTUAL money to pay back a loan the banksters created in a split second with the stroke of a keyboard entry......and the crux of the joke is while the guy at the bottom is sweating to make it, paying back those fake "dollars", enough new dollars must be created so he/she can pay the interest on the principle, so more "money" is created to allow that, which dilutes over time, the value of that the sucker at the bottom might save ( inflation ), making it more worthless all the time.

Yeah.....physcial slavery pretty much ended in the 19th century, because the banksters found a WHOLE LOT BETTER system in which they don't have to buy, feed, house or care for the slaves, and the slaves are given the illusion they are free.  We've come a long way, baby.

Johnny Oxygen's picture
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

I sincerely believe that the governments plan is to buy up as much debt as possible then begin to devalue the currency to at least try and pay off the debt. But the most imoprtant thing about this is that they will have to some real wealth to work with and that means gold. I think Executive Order 6102 (making the ownership of gold in any large amount illegal) will be reinstated in some form. After all there is already a precident for it. I don't see this as be so unthinkable.

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Is not this FED action and other similar purchases prerequsit to high inflation?  

I think Marc Faber is right saying that US will have hyper-inflation.   My question is how high of inflation and WHEN will it start?

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Re: Is Freddie Mac Quietly Purchasing Mortgages?

I got the exact same letter from Chase, with the same weird "to Freddie Mac or to Freddie Mac".  Not sure what to make of it.

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Chris, 

A very well researched paper. However, one assumption which seems a bit far off:  You used 10% as an average down payment for a home.  This is typically the case for a first-time buyer.  However, for the category of individuals who sell their primary residence and trade up, can typically put down more than 10%. 

Example:  Say, my home is worth $400K today.  I put down 10% ($30k) down payment 10 years ago.  There is $100K appreciation plus I paid down the principal by another $40K.   Ok, now I have $170K of equity ($30K+$100K+$40K). Now, let's say, I decide to upgrade to a $600K home.  Let's say I only put down $120K of this equity;  this is a 20% down payment.

Bottom-line:  I feel that an ave 15% downpayment would be more realistic.

best regards,

R. Kyle Martin
ps. you may want to check out my paper "The Rise and Fall of Artificial Wealth" which was published by the Huffington Post

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Fed mortgage cash flow?

1.  What is the total cash flow generated by mortgage equity held by the Fed?  How is it distributed?

2.  Are Fed assets public property?  Are revenue streams flowing to the Fed public funds?

3.  Could revenue streams from mortgages held by the Fed be used to retire Federal obligations, such as the national debt and restitution of reserves diverted from the Social Security Trust?

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Re: Is Freddie Mac Quietly Purchasing Mortgages?

RedShift

 RE:The transfer of ownership of your mortgage loan has not been publically recorded."

This is what's happening and it may be illegal in your state too.  Since the mortgages are sold over and over, it's difficult to keep the right paper work together. If the mortgage holder does not have the note and the deed of trust it is not possible to foreclose on the mortgage. Therefore, to avoid further selling and reselling Fannie is buying and will become the holder of record.  Which just may destroy MBSs. 

 A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

Moreover, “By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” [Citations omitted; emphasis added.]

Check out complete article:http://www.opednews.com/articles/LANDMARK-DECISION-PROMISES-by-Ellen-Brown-090921-894.html

Robbrian


 

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Vanityfox451
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

I have great respect for The ModernMystic and his You Tube Films, Particularly a film called Peak Oil 101, which he produced on August 29th 2008 with a link to Chris Martenson and the crash Course. With cause and effect and nearly 650 personal posts later, I'm still writing and promoting CM.com as best I can!!

Below is another installment, with his take on the latest Martenson Report :-

Best,

Paul

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Kyle - You raise a good point about that 10% assumption.

See this link at CalculatedRisk regarding 1st time homebuyers, which number 43% in Q2. Investors number another 29%.  Do investors tend to put down a lot of money down on a home? If it's to buy and flip, sure, since by the time they get a loan, they could have fixed up and flipped the house already. The remaining buyers, 29%, are move up buyers, and considering how much equity homeowners have lost the past few years(along with other assets like stocks), they may not put down as much on a new home as you think. They may use some of that money to rebuild savings. Good point nonetheless.

rkylemartin wrote:

Chris, 

A very well researched paper. However, one assumption which seems a bit far off:  You used 10% as an average down payment for a home.  This is typically the case for a first-time buyer.  However, for the category of individuals who sell their primary residence and trade up, can typically put down more than 10%. 

Bottom-line:  I feel that an ave 15% downpayment would be more realistic.

cmartenson's picture
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Kyle,

To continue your point, cash buyers are also a larger proportion of the current market than ever before (scooping up bargains we assume), so that would drive a further wedge into the gap between total mortgage origination and Fed purchases.

I always prefer to err on the conservative side and I think that's safely been done here.

Thank you for directing me to your paper in Huffington Post.  Very well done and I encourag everyone here to read it.

Here's the link to The Rise and Fall of Artificial Wealth.

Cheers,

Chris Martenson

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affert
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

rkylemartin wrote:

Chris, 

A very well researched paper. However, one assumption which seems a bit far off:  You used 10% as an average down payment for a home.  This is typically the case for a first-time buyer.  However, for the category of individuals who sell their primary residence and trade up, can typically put down more than 10%. 

Example:  Say, my home is worth $400K today.  I put down 10% ($30k) down payment 10 years ago.  There is $100K appreciation plus I paid down the principal by another $40K.   Ok, now I have $170K of equity ($30K+$100K+$40K). Now, let's say, I decide to upgrade to a $600K home.  Let's say I only put down $120K of this equity;  this is a 20% down payment.

Bottom-line:  I feel that an ave 15% downpayment would be more realistic.

best regards,

R. Kyle Martin
ps. you may want to check out my paper "The Rise and Fall of Artificial Wealth" which was published by the Huffington Post

On the flip side, there are still many people that are putting far less than 10% down.  When we purchased our house this summer, we went with a conventional loan, which required a 10% downpayment (which we did).  (We're first time home-buyers BTW).  We were also offered an FHA loan, which would have required a 3.5% downpayment.  This struck us both as insanity.  We were shocked that this was still an option.  I guess we (as a country) haven't really learned much.   But I bet there are plenty of people taking that option.

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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

It is like in ex USSR, ex Yugoslavia and any other communist country; individual can not be owner of home or any real estate. He can only be sub tenant where state is one and only householder and landlord. This monopoly of state was acquired through expropriation of real estate from citizens. This expropriation was sometimes followed by execution (and "sometimes" is understatement). It is nice to know that capitalist system of US&A is more humane; first banks land you money they don't have, then they suck you dry through interest, when you can't pay mortgage they consficate your home, then since the real estate is now worth shit because banks gave too much loans, federal government and Federal Reserve come in and buys mortgages from banks with money they dont have. And where from comes money of federal government? From Federal Reserve! And where from comes money of Federal Reserve? From printers. And who is controlling the printers? Federal government.  And who is controlling printing of money? Federal Reserve. WTF?Cool, that life baby! I'd like I could menage bank and economy like that, but if I print money (US dollars) without cover (or even with) then I'm a criminal! If they print money, they are bankers! This is crime of the millenium! It seams to me that in USA there is same result with real estate like in communist countries although the path to that result was somewhat different. Communism and capitalism both strive toward the same goal, and that goal is economical enslavement of society and people by any means necessary and available, in any given moment of hystory.

THROUGHOUT HISTORY POWER WAS, IS AND WILL BE  IN THE HANDS OF THOSE WHO CONTROL ECONOMY. ONLY INDIVIDUAL THAT IS TRULY FREE IS ONE THAT IS ECONOMICALLY INDEPENDENT AND ONLY STATE THAT IS LAND OF FREEDOM IS ONE WHOSE CITIZENS ARE ECONOMICALLY INDEPENDENT INDIVIDUALS. AND ONLY TRULY FREE PEOPLE CAN ELECT GOVERNMENT OF THE PEOPLE, BY THE PEOPLE & FOR THE PEOPLE.

                                                                                                                                                 Hrvoje Stanojević

Enough said, good luck to You all and live long and prosper.

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Pablo H
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Re: Federal Reserve Buys More Than 100% of Mortgages Issued ...

Great article.This raises and interesting question about the true value of Tier 3, off balance sheet holdings?

With regard to Wells selling the mrotgage to Freddie. The best info on the Landmark v. Kessler debate is http://bank-o-meter.com/bank-o-meter/component/content/article/1-latest-...

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