Since the Great Financial Crisis of 2008, the Federal Reserve Bank of New York has been the largest and most influential participant in the mortgage-backed securities market. In the past 14 years, the Fed’s holdings of conventional and GNMA pools has grown from zero to $2.7 trillion, representing roughly a third of the outstanding market. With inflation spiking, the Fed has announced an end to MBS purchases and will shift into balance-sheet-reduction mode. In this short post, we review the Fed’s holdings, their distribution across coupon and vintage, and their potential paydowns as rates rise.
The New York Fed publishes its pool holdings here. The pools are updated weekly and have been loaded into RiskSpan’s Edge Platform. The chart below summarizes the Fed’s 30yr Fannie/Freddie holdings by vintage and net coupon.
We further categorize the Fed’s holdings by vintage and borrower note rate (gross WAC) at the loan level. Using loan-level data (rather than weighted-average statistics published on Fed-held Supers or their constituent pools [1]) provides a more accurate view of the Fed’s distribution of note rates and hence prepayment exposure.
Not surprisingly, the recent and largest quantitative easing has left the Fed holding MBS with gross WACs below the current mortgage rate. Roughly 85% of the mortgages held by the Fed are out-of-the-money, and the remaining in-the-money mortgages are several years seasoned. These older pools are beginning to exhibit burnout, with the sizable refinancing wave over the last two years having limited these moderately seasoned loans mainly to borrowers who are less reactive to savings from refinancing.
With most of the Fed’s portfolio at below-market rates and the remaining MBS moderately burned out, market participants expect the Fed’s MBS runoff to continue to slow. At current rates, we estimate that Fed paydowns will continue to decline and stabilize around $25B per month in the second quarter, just shy of 1% of its current MBS holdings.
With these low levels of paydowns, we anticipate the Fed will need to sell MBS if they want to make any sizable reduction in their balance sheet. Whether the Fed feels compelled to do this, or in what manner sales will occur, is an unsettled question. But paydowns alone will not significantly reduce the Fed’s holdings of MBS over the near term.
[1] FNMA publishes loan-level data for pools securitized in 2013 onward. For Fed holdings that were securitized before 2013, we used FNMA pool data.
