Wednesday, November 21, 2012

Puzzling over the mortgage backed securities market ...

There is undoubtedly a lot I don't understand, but the news just noted that the US Federal Reserve is spending $85 billion per month on buying up securities, mostly of the mortgage backed type.  That is an asset shell game worth $1 trillion per year.  Is that in addition to the $1 trillion per year deficit?  Something to ponder over.

Mortgage backed securities are pieces of paper that state who owns the house loan that we pay ... in other words, when we mail a payment in, who finally gets the money?  Since the homeowner has to make his payment regardless of who owns the loan, this isn't directly relevant to him.  What it effects is who gets left holding the bag when 1.41% of homeowners default on their loan each month.  If the Fed is holding the bag, then, well, I guess they are the one holding the bag when the defaults happen.  It appears to be a great way to sweep the losses under the rug, without any possible negative side effects.  I am wondering why we haven't just been doing this for the last century?  Or to put it another way, why doesn't the Fed just loan everyone whatever money they need to buy whatever house they want at zero interest?

1 comment:

Dee Ice Hole said...

And then make the payment for them.