Agency MBS Purchase

Agency MBS purchase is the purchase of mortgage-backed securities issued by government-sponsored enterprises such as Ginnie Mae, Fannie Mae or Freddie Mac. The term is most commonly used to refer to the U.S. Federal Reserve's $1.25 trillion program to purchase agency mortgage-backed securities, which commenced on Jan. 5, 2009 and was completed on Mar. 31, 2010.

It is common practice for banks to sell a huge percentage of their active mortgages to participants in the secondary mortgage market. Participants may include institutional investors, private firms, and governmental and quasi-governmental entities. These participants purchase mortgages from banks and package mortgages that have common features into pools – a process known as securitization – to create financial securities that can be sold in the open market to investors. Each pool constitutes a security known as a mortgage-backed security (MBS) which represents an interest in the pool of mortgages. Like bonds, MBSs make semi-annual or monthly interest payments to investors.

An agency MBS is a mortgage-backed security issued by one of three quasi-governmental agencies - Government National Mortgage Association (GNMA or Ginnie Mae), Federal National Mortgage Association (FNMA or Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac). Following the credit crisis that started in 2008, the Federal Open Market Committee (FOMC) sought to provide additional policy stimulus by expanding the holdings of fixed-rate agency MBSs in its portfolio in order to lower longer-term interest rates and contribute to an overall easing of financial conditions.

The goal of the Federal Reserve's $1.25 trillion agency MBS purchase program was to provide support to mortgage and housing markets, and also to foster improved conditions in financial markets. When the Federal Reserve commenced these purchases in January 2009, the U.S. and global equity markets were trading at multi-year lows amid an intense credit crunch, and widespread concern about the global economy heading for a depression.

The MBS purchase program was instrumental in providing price support to these securities and dissipating the panic that had gripped many market participants. By the time the Federal Reserve completed the purchase program in March 2010, the S&P 500 had appreciated more than 75% from its March 2009 low and global equity markets had been in full rally mode for over a year, perhaps exceeding the Fed's most optimistic expectations.

Agency MBS purchases are carried out by the New York Fed’s Open Market Trading Desk as authorized by the FOMC. The Agency MBS securities are purchased in the System Open Market Account (SOMA) portfolio. Principal payments received from these holdings are reinvested by The Trading Desk in newly-issued MBS securities backed by Fannie Mae, Freddie Mac, or Ginnie Mae. Purchases of agency MBS increase the quantity of reserve balances in the banking system; sales or principal paydowns reduce those balances.