Fannie Mae (FNMA)

[navycmdr]

What Happens to the Mortgage Market When the Fed Pulls out of MBS ?

By John Bancroft [e-mail]

The mortgage market faces a big challenge when the Federal Reserve figures out how to unload its massive $1.7 trillion portfolio of agency MBS, but anticipated widening of spreads could at least improve market liquidity.

The fixed-income market has seen a sharp decline in trading volume resulting in part from regulatory issues, said Mike Fratantoni, chief economist at the Mortgage Bankers Association, during the group?s recently secondary market conference. ?Banks have been hoarding liquidity instead of providing it to the market,? he said.

Average daily trading volume of MBS has dropped below $200 billion, compared to the $300 billion average in a typical market and about half the level of a couple years ago, he noted.

A big part of the liquidity issue is caused by the Fed?s massive holdings, said Steve Abrahams, a managing director at Deutsche Bank.

The Fed doesn?t re-trade its holdings, which account for a huge share of recently originated MBS that are typically the most actively traded securities. For more on the story, see Inside MBS & ABS.