Who Will Buy as Federal Reserve Holdings of MBS Decline?
The Federal Reserve currently holds about $1.8 trillion of mortgage backed securities on its balance sheet, nearly 1/3 of the total outstanding. This has served as a contributing factor to keeping mortgage rates low, in an effort to prop up the mortgage market. As the Fed’s balance sheet contracts, who will pick up these securities? One possible source of purchases is foreign investors, notably in China. Chinese investors held $0.2 trillion in MBS at present, less than half of the balance held prior to the financial crisis. Low mortgage rates are a disincentive to add to MBS purchases, but this may change as the US central bank normalizes monetary policy. A risk, however, is regulatory uncertainty. Changes in Dodd Frank may have an impact on bank holdings of these securities, and the future of the GSE’s remains unsettled. While these and other factors remain unresolved it is very difficult to form a clear view on the durability of the US housing recovery.
