For over a year, the Federal Reserve has been pouring money into American mortgages. Buying "mortgage-backed securities" (MBS), financial instruments whose value is based on a pool of underlying mortgages.
When the financial crisis broke, the market for MBS dried up. Buyers feared that homeowners would default on their mortgages. Driving the value of these assets to almost nothing, or worse.
Financial institutions in America and around the world were left holding trillions of dollars worth of non-saleable MBS. It appeared these holders would be forced to mark down the value of their MBS holdings, potentially triggering another wave of bank (and pension fund, insurance provider, etc.) failures.
The Fed moved decisively to prevent this. Stepping into the MBS market and buying hundreds of billions of dollars worth of MBS weekly in early 2009. Taking these assets off the hands of financial groups.
Of course, to pay for these purchases, the Fed created new money. MBS purchases are one of the major items responsible for ballooning the U.S. monetary base by $1.2 trillion since October 2008.
And the Fed has continued buying for the past year. All told, Fed MBS purchases total nearly $1.1 trillion.
This is a massive intervention in a troubled market. One that is apparently now over.
According to previous announcements, Fed officials planned to wrap up MBS purchases by March 31, 2010. Yesterday should have been the first "Fed-free" day for the mortgage market.
This is a critical change (if in fact the Fed sticks to its plans).
Will the MBS market hold up absent government intervention? Or are there more skeletons in closet, despite the appearance that the economy is getting back on track?
A pullback in Fed buying could expose weaknesses still lingering in the system.
Providing some unpleasant surprises for the economy, stock markets and investors.
Keep an eye on these numbers to see if the Fed does indeed go cold turkey. If they do, be extra vigilant on the rest of the mortgage-related data for the next few months.
By. Dave Forest of Notela Resources