The Fed appoints Investment Managers to manage mortgage-backed securities
Concerted efforts are underway at the Federal Reserve to keep mortgage rates low. The Fed has appointed Black Rock Inc., Goldman Sachs Asset Management, Pacific Investment Management Co. and Wellington Management Co. to manage a $500 billion purchase of mortgage-backed securities, Bloomberg has reported. All four companies are known for their asset management prowess. The objective is to keep mortgage rates low.
Year 2008 saw a dramatic collapse of US mortgage finance which sparked widespread write-downs and massive losses at financial institutions. The credit crisis that ensued has driven the US economy to a recession. The year also marked bankruptcies including Bear Sterns and Lehman Brothers. It has been a forgettable year for the US economy.
As the government continues its attempts to revive the economy, the appointment of four companies to manage the $500 billion portfolio of mortgage-backed securities ushers some hope. The Fed has plans to purchase the bonds to bolster bank reserves. Purchases however will be confined to only fixed-rate agency mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae and will include securities with maturities of 30, 20, and 15 years.
The Fed’s focus is to reduce outstanding agency bonds and lower their yields leading to a reduction in bank interest rates on new mortgages. Results of these efforts are becoming apparent as the average rate on a typical U.S. fixed-rate mortgage has gradually fallen.
According to the Bloomberg article, the investment managers are required to purchase securities frequently and to disclose the Federal Reserve as principal. Investment managers are also required to implement ethical walls that appropriately segregate the investment management team that implements the Fed’s purchases from advisory and proprietary trading teams.
All these measures have had little impact on the housing market though. The Standard & Poor's Case-Shiller 20-city Index, which follows home prices in the 20 largest U.S. cities, has fallen 18% in October, marking a record year-over-year (YOY) decline since its inception in 2000. We are running a separate article on US home prices.
Courtesy: Bloomberg, FreddieMac
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