Professional Home Staging and Photography Blog: The Fed could make billions on MBS - mortgage-backed securities

The Fed could make billions on MBS - mortgage-backed securities

The Federal ReserveWhen the housing market began recently unraveling at warp speed and quickly lugged the overextended mortgage industry along with it things looked quite bleak for the U.S. economy. Housing, after all, is one of its major components and should it be hit with a serious medical condition, taking a simple pain killer wouldn't help much. Then if ever, when the fury of the real estate sector's downturn became better understood, drastic action was called for.

The Federal Reserve bravely stepped forward intent on showing how it's done. Right on the heels of the private investor vanishing from the secondary mortgage market the Fed knew that to avoid an utter disaster with global consequences it had to quickly fill the vacuum. It began buying MBS, or mortgage-backed securities, insuring that home loan interest rates wouldn't shoot through the roof. That was essential to keep the housing market on its wobbly feet, giving it something concrete to rely on. There was some early howling against this vast government interference but it soon abated as stark reality set in. Without the Fed's decisive action Stone Age would have been right around the corner.

Congressional Budget Office, or CBO, reports that the Fed's asset collection now exceeds $2 trillion, of which MBS make up well over half. Other holdings include Treasury securities and bank loans. It earns interest on all that paper, as it should. CBO projects that the Fed will haul in about $70 billion in profit this year on its portfolio, money that it'll eventually remit to the Treasury. The central bank assumed far more risk than it usually does by purchasing MBS, but it seems to be paying off. Who says the public sector can't make money?

The government has bailed out scores of mortgage lenders and financial institutions during this notorious housing meltdown, partly with the idea that they would then help distressed homeowners ward off potential foreclosure. To a large extent, the results are disappointing. Their playbook instead often included such selfish tactics like paying absurd bonuses and completing acquisitions, tricky moves that stimulated much of the angry population into voluntary Wall Street watchdogs with a mission.

What if the Obama Administration came up with a new initiative using the $70 billion Fed profit to make a real and lasting difference in the mortgage foreclosure predicament? The current programs addressing it, the HAMPs, RAMPs and STAMPs and such, have principally proved inefficient. Now is the time to try a fresh angle to try to sort this housing and mortgage mess out and here is a nice down payment for it.

Photo by wwarby



Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 20 commentsEsko Kiuru • May 27 2010 06:28PM


WOW!  I knew their motive was to make money in order to fund some of the programs they created but I really didn't think they would achieve that goal!

Have a great extended weekend Esko!

Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) almost 9 years ago

A really interesting post.  I think most of us had no idea of the Fed earnings on MBS.

Posted by Margaret Mitchell, Seacoast Maine & NH Real Estate (Coldwell Banker Yorke Realty) almost 9 years ago

Great Info!

Posted by Ben Yost - 303-587-4297, FHA, VA, Conventional - Mortgage Loans in De (First Time Home Buyer, Mortgage Rates, Pre-Approval) almost 9 years ago

This is a piece of very interesting and encouraging information ... it also points out how much money/resources have been sucked away from our economy by those greedy bank executives. One note of caution, I hope the government has a strategy in place in case the rates start hiking.

Posted by Ed Tseng almost 9 years ago

Wow! What a dearth of comments on this piece that points out, obliquely, that the so-called bail-outs are actually loans and investments, and that the treasury has a decent chance of getting it all back over time. Already some of the big banks have repaid their loans, with huge interest payments. I think the Federal government should get a huge pat on the back for coming up with a plan to forestall a complete, world-wide money melt-down.

The Government is not the enemy. It is YOU (and me).

Posted by Denver Johnson (West USA Realty, Mesa AZ) almost 9 years ago

I am glad the government is not loosing money on everything, but I think in the long run I do not want the government directed what should be a private endeavor.

Posted by Gene Riemenschneider, Turning Houses into Homes (Home Point Real Estate) almost 9 years ago

A while back I was discussing this and realized that the Govt has put themselves in a very interesting, capitalistic position of control of mortgage rates.  They are probably the largest holder of mortgaged back securities.  If rates start to rise beyond what they want to see, they can simply sell some of their holdings to bring the rates down.  And then, these pay interest to their owners, so as you've pointed out here in your blog, they're making a nice return on their investment.  Ironically, perhaps, they followed Wall Street's advice and bought low and can now sell high.  Maybe we, the taxpayers, won't be in as much trouble as we feared when all of this started.

Posted by Carol Neu, SFR, RCS-D - Big Bear Foreclosures (Evergreen Realty) almost 9 years ago

From what I have seen/read the FED made the most money ever last year, and I do not mean on the printing press!

Posted by Keith Lutz (Keller Williams Metropolitan) almost 9 years ago

Great piece Esko. Thanks for sharing.

Posted by Lee Ali (Las Americas Real Estate) almost 9 years ago


This MBS bonanza probably surprised the Fed, too.

Posted by Esko Kiuru almost 9 years ago


They didn't make too much noise about it because of the risk involved, but it seems to have worked out just fine.

Posted by Esko Kiuru almost 9 years ago


Thanks for stopping by.

Posted by Esko Kiuru almost 9 years ago


This really is good news, showing that the government can get real results.

Posted by Esko Kiuru almost 9 years ago


Yes, the government needs to be given some credit here for getting a nice return for its investments.

Posted by Esko Kiuru almost 9 years ago


The Fed shouldn't have been involved in MBS purchases, but it really had no choice in order to keep the system working.

Posted by Esko Kiuru almost 9 years ago


It's good to see that the government can use taxpayers' money wisely.

Posted by Esko Kiuru almost 9 years ago


Those guys know a thing or two about money and returns, no question.

Posted by Esko Kiuru almost 9 years ago


Thanks for coming by to read the blog.

Posted by Esko Kiuru almost 9 years ago

So, what do you suggest that the Feds do with this down payment? What programs could they start that would get us past this situation?

From what I understand, the profits that the Feds are enjoying were largely unanticipated, so how can we know or even hope that they can come up with a workable program that will help us in the future?

Posted by Thomas McCombs (Century 21 HomeStar) almost 9 years ago


The Treasury, which gets the profit, likely has a capable official or two who could work something useful out.

Posted by Esko Kiuru almost 9 years ago