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The Federal Reserve's portfolio and its effects on mortgage markets

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Abstract
We provide an empirical analysis of the effects of the Federal Reserve's asset holdings on MBS yields and mortgage rates. We argue that understanding the particulars of the U.S. mortgage markets, particularly the linkages between the secondary and primary mortgage markets, is important. We find evidence that the Federal Reserve's portfolio holdings influence mortgage markets, through both a \"portfolio balancing channel\" and an \"excess reserves\" channel. These two channels can work in opposite directions and their magnitudes are difficult to estimate, but on net, larger Federal Reserve's portfolio holdings seem to have placed a significant downward influence on MBS yields and mortgage rates.

Suggested Citation

  • Diana Hancock & Wayne Passmore, 2012. "The Federal Reserve's portfolio and its effects on mortgage markets," Finance and Economics Discussion Series 2012-22, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2012-22
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    References listed on IDEAS

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    1. Xavier Freixas & Antoine Martin & David Skeie, 2011. "Bank Liquidity, Interbank Markets, and Monetary Policy," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2656-2692.
    2. Jonathan H. Wright, 2012. "What does Monetary Policy do to Long‐term Interest Rates at the Zero Lower Bound?," Economic Journal, Royal Economic Society, vol. 122(564), pages 447-466, November.
    3. Hancock, Diana & Passmore, Wayne, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 498-514.
    4. Andreas Lehnert & Wayne Passmore & Shane Sherlund, 2008. "GSEs, Mortgage Rates, and Secondary Market Activities," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 343-363, April.
    5. Heuson, Andrea & Passmore, Wayne & Sparks, Roger, 2001. "Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 337-363, November.
    6. Phillip Swagel, 2009. "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 1-78.
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    8. Andreas Fuster & Paul S. Willen, 2010. "$1.25 Trillion is still real money : some facts about the effects of the Federal Reserve’s mortgage market investments," Public Policy Discussion Paper 10-4, Federal Reserve Bank of Boston.
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    11. Nicholas Sharp & David Newton & Peter Duck, 2008. "An Improved Fixed-Rate Mortgage Valuation Methodology with Interacting Prepayment and Default Options," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 307-342, April.
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    Cited by:

    1. Sergio Bianchi & Massimiliano Frezza, 2018. "Liquidity, Efficiency and the 2007-2008 Global Financial Crisis," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 375-404, November.
    2. Saty Patrabansh & William M. Doerner & Samuel Asin, 2014. "The Effects of Monetary Policy on Mortgage Rates," FHFA Staff Working Papers 14-02, Federal Housing Finance Agency.

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