The Fed Is The Mortgage Market

Imagine yourself sitting at home one day thinking about how wonderful life is here in America. You decide that you want to get out there and buy yourself a new home.

You're going to need some money to purchase the home so you decide to take a ride down to your bank and ask to borrow about $300,000. They say no problem, hand you a small piece of paper and then you move into your home next week.

The bank then takes that $300,000 mortgage and sells into into the secondary market. It can go many directions from here. Fannie and Freddie can buy it, a hedge fund in China can buy it, or it can be packaged with multiple mortgages and sold off into little pieces. Those buyers can then sell it again to someone else.

The important thing is that at the very end of the line someone has to come up with $300,000 to purchase your mortgage. There has to be an end buyer.

So far this year (through August) there has been $692 billion worth of existing homes sold, and $69 billion worth of new homes sold. The following chart shows the breakdown:

Estimating new homeowners putting down 10% on the mortgages, we have 685 billion dollars worth of new mortgage debt this year.

This means that someone has to come up with that money, some end buyer, in order for these transactions to take place.

The following chart shows the total number of mortgages purchased by the Federal Reserve this year:

The Federal Reserve this year has purchased $722 billion in mortgage debt. That represents the entire market. 100%.

They have just recently pushed back their mortgage buying program to March of next year. They are currently planning on purchasing over $1.25 trillion in mortgages, but that number will be revised upward next year.

The Fed is the mortgage market right now. What would happen if that market went away?

(Charts courtesy of Chris Martensen)