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Mortgage Market Roulette

March 23, 2014
454px-IOF-32-REV-4Following the Fed meeting last week, I was interviewed by Thomas Ressler, editor of Inside the CFPB (Published by Inside Mortgage Finance Publications) focusing on the impact of Fed policy on MBS and the housing market. His summary of our discussion:
More broadly speaking, Fed watcher John Cochran, emeritus professor of economics at Metropolitan State University of Denver, agreed that one of the first things that needs to happen to attract private capital back into the MBS market is for the Fed’s footprint in the space to shrink. However, given the drop-off in new issuance, the Fed’s share of the pie may actually be increasing. It’s true that the Fed is reducing its purchases somewhat, but “the trend seems to show that they’re buying a larger and larger percentage of total new securities issued,” Cochran said. “So I’m not really certain when and how private money is going to be attracted in on a significant basis when we’re really overly dependent on these extremely low rates and holding onto, in the Fed’s balance sheet, significant portions of these MBS.” He also shares the concern that the housing market is on the verge of another bubble because of the low interest-rate environment. “What part of a bubble don’t people understand, where they’re looking at returns to 2007, 2008 housing prices as a sign of recovery?” the professor said
In our discussion sumarized in the last paragraph I refered  Mr. Ressler to the excellent Housing Bubble 2.0 by David Stockman posted at LewRockwell.com . If you haven’t seen it is well worth a read. Even with tapering QEIII is a large intervention is important credit markets and is still an ineffective (relative to its stated goals) and long term harmful mondustrial policy. After being relatively stable from  September 2013 through December 2013, both the monetary base and bank excess reserves restarted their upward trend in January. Fed while slowing purchases on long end must be very active on short end again to maintain near zero interest.

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