Is The Fed To Blame For High House Prices? 4
Clearly US banks have not been very keen to hold on to the mortgages that they have created, instead offloading them to the GSEs.
While this isn’t surprising per se, since the Fed is still quite aggressively purchasing Agency MBS, what is noteworthy is how much the pace of this offloading has accelerated over the last 6 months.
What could this mean?
As the GSE chart shows, the total amount of mortgages held by GSEs is increasing at the fastest rate in a decade!
A bank unwilling to hold on to a mortgage suggests that, on a risk adjusted basis, they’d prefer to not participate in the loan’s upside, which implies that they see a higher than normal chance of the loan becoming impaired.
In other words, a bank is happy to offload a mortgage to someone else because they think that they will make more money by doing so, as opposed to collecting the interest it generates but exposing themselves to the risk of default.
This raises a number of concerns, not least of which is the strength of the US housing market.
Considering that banks choosing not to hold on to mortgages that they have made signals some level of reluctance on their part to be exposed to US housing, is the market really as strong as recent price increases and headlines suggest?
More importantly, if banks are selling their mortgages out of concern over whether borrowers can actually repay them, what does this say about the state of the current economic recovery?
Even as headline inflation numbers cause hysteria and job numbers continue to improve, it is easy to forget that US yields are hinting at an outcome that is more stagflationary than inflationary, and that the US labor market recovery is still very nascent.
Should the economy continue on this trajectory of recovery but not robust growth, banks offloading their mortgages to GSEs could quickly devolve into banks drastically slowing down their pace of mortgage lending.
If this happens, whether or not the Fed purchases MBS or not becomes irrelevant, as demonstrated by the years between 2009 and 2018, where MBS purchases did not alter banks’ lending behavior.
Finally, it is also worth pointing out that all of this is occurring even as the US government and the Fed have spent trillions of dollars in fiscal and monetary stimulus.
Perhaps, instead of focusing on whether or not the US housing market is in another bubble, it would be more constructive to question why fiscal stimulus is not as effective as everyone likes to think it is. Not to mention, does QE actually work?
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