Why the MBS roll-off will be faster than the Fed’s balance sheet

It was half of the maximum speed. But rising home sales and, lo and behold, rising mortgage refs are about to change that.

By wolf richter For wolf street,

In its quantitative tightening plan last spring, the Fed fixed caps that limit how much of its Treasury securities and mortgage-backed securities (MBS) it is allowed to roll off the balance sheet each month: $60 billion for Treasury securities. per month and $35 billion a month for MBS. As per the latest weekly balance sheet, Net wealth has declined by $532 billion from the peak, Treasury roll-offs have been close to the cap, but MBS roll-offs have been significantly lower.

The Fed stopped buying MBS in mid-September. From that point through the end of November, the four-week average roll-off of MBS was approximately $20 billion. In December and January, the four-week average declined to $17 billion, moving at about half the pace from the maximum.

MBS roll-off since the start of QT in June is just $103 billion. But if the roll-off had happened closer to the cap, the MBS roll-off should have been around $260 billion by now. This chart shows the actual balance of the MBS (red) and my estimate of the balance if the roll-off had proceeded near the cap, including the summer phase-in. The gap with which MBS appears on the balance sheet,

Why MBS roll-off will be faster,

There are some dynamics in the mortgage market now that will trigger MBS roll-offs in the spring and summer. It might not be quite enough to roll-off the cap – we’ll have to see – but it’s going to get it pretty darn close.

MBS comes off the balance sheet primarily through the pass-through principal payments that all MBS holders receive when regular mortgage payments are made and when the underlying mortgage is paid off, such as when the home is sold. or when the mortgage is refinanced with a new mortgage.

People Still making my regular mortgage payments, But mortgage payments have collapsed as refis volume is down nearly 80% from a year ago, and as Home sales decreased by about 34 percent from a year ago. And the torrent of principal payments the Fed has received from a year ago and has so far exceeded $35 billion a month.

mortgage payment from home sale,

The worst period was winter. Now begins the spring sales season, when sales volumes are each year fueled by the winter gloom and holiday slump of the housing market. Even during the housing bust 1, sales volume increased in the spring. The point when a mortgage pays off occurs at closing, so this roughly aligns with the reported closed sale.

The low point in closed sales is in January or February, depending on the deals made the week before, so mostly in December and early January, during the dead-point. In March, closing sales increase and peak during the spring sales season and summer.

Last year, between the January/February low and the August peak, monthly sales volume for existing homes (not seasonally adjusted as reported by the National Association of Realtors) increased by 34%.

Every time the mortgaged home is sold, the mortgage is repaid. If the mortgage was securitized, the principal portion is eventually passed through to the MBS holders. This stream of pass-through principal payments to the Fed will increase substantially through the summer compared to the past few months, simply by the fact that home sales volumes will increase seasonally.

mortgage payoff from ref,

It’s hard to believe, but Americans are at it again: riffis have started to tick up this year from levels that fell last year, mostly cashing-out riffis. People are actually refinancing lower rate mortgages with higher rate mortgages to cash out some of the equity in their home. Maybe by August expect mortgage rates to go back up to 3%, and then they can refinance again or whatever.

At any rate, the amount of refs started to increase in early January. From levels that fell in late December, the weekly refinance index released today by the Mortgage Bankers Association has jumped 77% to its highest level since September.

Pass-through principal payments take their time as they make their way through the system, with mortgage payoffs occurring when the Fed books them by reducing the balance of its MBS on its balance sheet. So we should start to see that momentum carry over.

Refi volume is still down 74% compared to a year ago. But it was down 86% at the end of December. And a year ago, when there was a stream of pass-through origination payments that so far exceeded $35 billion a month. So it’s not a comparison. No one is expecting that stream of pass-through principal payments.

This comparison is made to December and January, and then to last year’s decline, to estimate how this increase in pass-through principal payments will accelerate the roll-off of MBS, from the current pace of about $17 billion per month. .

The Fed just goes ahead and destroys that money = QT.

Every company has a “cash” account where it accounts for money it holds at the bank or in other near-cash instruments. The Fed does not have a cash account. When he needs money to buy property, he creates that money; And when it is paid for property, it destroys wealth.

So what does the Fed do with these pass-through principal payments from MBS?

Pass-through principal payments reduce the balance of the MBS (reducing that asset account on the balance sheet). But instead of increasing the cash account all at once by the amount of the pass-through principal payments, as a company would do, the Fed just goes ahead and destroys the money, and the total assets on its balance sheet decrease by that amount. (But a company’s total assets will remain unchanged because it is only replacing the MBS with cash, and both are assets).

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it very much. Click on the Beer & Iced-Tea Mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here,

Source link

Leave a Comment