MBS RECAP: 10/24/2011


We’ve discussed the significance of the Fed’s recent decision to specifically include a nod to MBS in the last FOMC Statment where Operation Twist was announced. It seemed too coincidental that MBS spreads were on a “crash course” of sorts, with the desuetude of Fannie/Freddie and HARP 2.0 speculation–almost TOO coincidental.

It was reminiscent of the last time spreads were on a major crash course when even the unveiling of the conservatorship couldn’t turn the tides of widening spreads, albeit on a smaller scale this time. But just because the Fed hasn’t announced another $1.5 Trln of new MBS purchases doesn’t mean they’re any less keenly focused on how MBS are performing in a market where the housing situation is seen as an integral part of the solution.

If anything, on the spectrum of MBS spread, the Fed acted SOONER this time than in 2008. Granted, there are detractors from this notion of the Fed acting as a protector of MBS spreads, but then there’s William Dudley, the President of the New York Fed–you know, the one that actually handles the FOMC’s directives in the MBS market–saying the following today:

“The fact that we decided to reinvest maturing funds back into the agency mortgage-backed securities market I think is a signal that we have some concerns about the level of mortgage spreads, and certainly that we do care about housing affordability as a way of supporting economic activity.”

Just another piece of evidence in whatever case you’re comfortable building for the Fed’s ongoing role as the MBS spread backstop.

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