More on Gagnon

Robert Waldmann | September 8, 2012 12:26 am

I have been trying to write a post on what could be achieved by Fed purchases of agency issued MBS.  My only new point is that the MBS price that matters is the price paid to Fannie/Freddie/Ginnie not the price on the secondary market.  That is, the price that matters is the price of new MBS — the money sent in the direction of people who build houses now and of other people who refinance their mortgages now.  The price of outstanding MBS does not affect the housing market except through expectations.

Recall Gagnon’s proposal to drive the prime mortgage rate to 3% by unlimited purchases of agency issued MBS for at least a year.  Here the point is that the only MBS purchases that would matter are purchases of new MBS.  The flow of Fannie + Freddie purchases of mortgages is around $300 Billion a quarter (about the same as the flow of QEII purchases).  Sorry I don’t know abou Ginnie Mae the inventor of the MBS.  Also the flow would increase (which is the whole point of the operation).

If the Fed pays much more than anyone else is willing to pay for MBS, there is no way for private investors to undo the operation by speculating.  They would have to issue government agency issued MBS to do so.  They can make side bets and the price of assets which pay the same as agency issued MBS on that side bet market would be lower than the price paid to the agencies.  It also wouldn’t matter to the agencies or to home builders, home buyers, mortgage refinancers or mortgage initiators.

Oh and if definitely more than $ 300 billion a quarter (maybe twice that) sounds like a lot, recall that Joe Gagnon is the guy who used the quantity $ 5 Trillion in his initial proposal.

Update:  Mark Sadowski can navigate the SIFMA site better than I can.  My effort to extrapolate from one quarter was off by about $300 billion ($300 billion here $300 billion there and soon you’re talking real money).  Also they have data from Ginnie Mae (the inventors of the MBS).

Mark A. Sadowski Sep 8, 2012 12:45:00 PM  

Last year Fannie Mae, Freddie Mac and Ginnie Mae issued $590,300,
$301,100 and $327,000 million in U.S. Agency MBS for a total of $1,218,400 million. I got this from SIFMA:

http://www.sifma.org/research/statistics.aspx

It’s still true that the Fed may have to call more than $1,218,400 from the vasty deep to follow Gagnon’s instructions — there must still be some private label issues and they will be crowded out and, more importantly, the whole point is to get more mortgages written (either for new purchases or refinancing).  But it sure is true that Mark Sadowski got the numbers I couldn’t find.

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