The Great MBS Conundrum: A Market in Flux
The capital markets are currently navigating a significant challenge: a substantial shortage of Mortgage-Backed Securities (MBS) buyers, resulting in a daily deficit of about $2 billion in demand. Historically, Fannie Mae and Freddie Mac, Government-Sponsored Enterprises (GSEs), acted as the primary shock absorbers in this space, buying MBS to stabilize markets. Post the Great Financial Crisis, however, their collective portfolios have dwindled notably, and while the Federal Reserve stepped in with quantitative easing, its consistent buying days seem over. With the added factor of the Federal Reserve’s past interventions and the auctioning of MBS and Treasury portfolios of various banks increasing supply, the market stands at a pivotal juncture.
Options for resolution present themselves in diverse ways. On one end of the spectrum lies the philosophy of non-intervention, allowing the markets to self-correct. On the opposite end, adjustments to the governing protocols might empower the GSEs to resume their roles as market stabilizers. With the Agency MBS market boasting an outstanding volume close to $9 trillion, the gravity of the situation is undeniable. As the Biden administration contemplates the path forward, the overarching aim should be to ensure housing affordability, especially for those most impacted by the prevailing economic headwinds.