Normalizing the Fed Balance Sheet: Practical Considerations Laurie Goodman FRB of NY/ Columbia SIPA Co-Director, Housing Finance Policy New York, NY Center July 11, 2017 Urban Institute
Questions about the wind down • What should the terminal size of Fed portfolio be? • Much larger than pre-crisis. • The growth of currency in circulation alone requires that. • What should the terminal composition of the Fed portfolio be? Treasuries only, Treasuries + MBS? • The case for the inclusion of MBS in a perfect world is weak. • A more active MBS policy could act as a stabilizer, its not clear to me that this should be the Fed’s role • What do you do with the MBS tail? • The tail will be quite sizeable. • Would just holding it distort the market? • Wind down mix? • Do you want to wind down Ginnie/Conventional mix less than proportionately in order to favor the first time home buyer? • Do you want to reinvest in MBS that are less prone to prepayment slowdowns? • Will the Fed convert legacy Freddie’s to the single security (Q2, 2019)? • Does it matter? 2
Determining the Fed’s target portfolio size The Federal Reserve Balance Sheet through time Assets ($Billions) 20-Jun-07 20-Jun-12 21-Jun-17 Target Securities held outright $790,439 $2,623,099 $4,254,154 $2,644,376 Unamortized premiums and discounts $0 $0 $151,898 $0 Repurchase Agreements $21,000 $0 $0 $0 Maiden Lane and TALF $0 $15,597 $1,709 $0 Gold + SDRs $13,237 $16,237 $16,237 $16,237 Other Assets $46,192 $218,106 $50,259 $50,259 Total Assets $870,868 $2,873,039 $4,474,257 $2,710,872 Liabilities ($Billions) Currency in Circulation (Federal Reserve Notes) $773,636 $1,066,758 $1,508,773 $1,508,773 Deposits other than reserve balances¹ $12,923 $183,913 $305,881 $305,881 Reverse Repurchase Agreements² $30,443 $84,108 $446,236 $247,467 Other liabilities $28,137 $23,808 $7,895 $7,895 Capital Account $16,106 $54,669 $40,856 $40,856 Bank Reserves $9,441 $1,459,783 $2,164,616 $600,000 Total Liabilities $870,686 $2,873,039 $4,474,257 $2,710,872 Sources : Urban Institute Calculations from FRB H.4.1 Statistical Release. Note : Target assumes 600b in target reserve balances and repurchase agreements other than those of foreign official and international accounts go to zero. All numbers are in billions of dollars. ¹ Comprised of US Treasury General Account, Term deposits of depository institutions, foreign official and other deposits, and bank clearing deposits. ² Comprised of foreign official/international accounts and other 3
Growth of target portfolio over time vs. stated winddown Wind down Portfolio size Actual Target Winddown amount ( $Billions) ( $Billions) 4,500,000 60,000 4,000,000 50,000 3,500,000 3,000,000 40,000 2,500,000 30,000 2,000,000 1,500,000 20,000 1,000,000 10,000 500,000 0 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Months from the beginning of the wind down Sources : Urban Institute Calculations from FRB H.4.1 Statistical Release. Note : Target assumes 600b in target reserve balances and repurchase agreements other than those of foreign official and international accounts go to zero. 4
MBS are not going to winddown at plan Projected runoff Taper amt $Billions 25,000 20,000 15,000 10,000 5,000 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Months from the beginning of the wind down Sources : Urban Institute Calculations from FRB H.4.1 Statistical Release. Note : Target assumes 600b in target reserve balances and repurchase agreements other than those of foreign official and international accounts go to zero. 5
Neither are treasuries Total maturities Taper cap $Billions 120,000 100,000 80,000 60,000 40,000 20,000 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Months from the beginning of the winddown Sources : Urban Institute Calculations from FRB H.4.1 Statistical Release. Note : Target assumes 600b in target reserve balances and repurchase agreements other than those of foreign official and international accounts go to zero. 6
Actual winddown base case Portfolio size Actual Target MBS Treasury ($Billions) 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 Months from the beginning of the wind down Sources : Urban Institute Calculations from FRB H.4.1 Statistical Release. Note : Target assumes 600b in target reserve balances and repurchase agreements other than those of foreign official and international accounts go to zero. 7
Who owns total Agency debt? 100% 90% Other 80% Foreign Investors 70% Credit Unions Money Market and Pension Funds 60% Mutual Funds 50% REITs GSEs Broker/Dealers 40% Commercial Banks 30% 20% Federal Reserve 10% 0% 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017 Q1 Sources: Federal Reserve Flow of Funds and Urban Institute. 8
Move from Active Investors to more Passive Investors Brokers and Dealers (left) Banks and Thrifts (right) GSE Portfolio (right) Fed holdings $Billions $Billions 320 2,000 280 1,750 240 1,500 200 1,250 160 1,000 120 750 80 500 40 250 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 Sources: Federal Reserve Flow of Funds, Board of Governors of the Federal Reserve System, Inside Mortgage Finance, and Urban Institute. 9
Fed holdings by coupon and agency Fed holdings by coupon Fed Holdings by Agency 2.2% 7.0% 4.3% 23.4% 15.7% 47.6% 37.8% 28.9% 33.0% 2.5 and lower 3 3.5 4 4.5 5 and higher Fannie Mae Freddie Mac Ginnie Mae Sources: Federal Reserve Bank of New York, eMBS, and Urban Institute. 10
Rising rates have choked off refinancing activity PMMS PMMS rate vs. Refi Activity Index MBA Applications Survey: Refi Activity Index PMMS rate Refi Index 5.00 7000 4.80 6000 4.60 5000 4.40 4.20 4000 4.00 3000 3.80 3.60 2000 3.40 1000 3.20 3.00 0 2011 2012 2013 2014 2015 2016 2017 Sources : Credit Suisse and Urban institute 11
As rates have risen, most of the mortgage universe has become non-refinanceable Percent of the 30-year universe that is refinanceable versus the weighted average coupon of the Agency market WAC %Refinancable WAC Percent 9 90% 8 80% 7 70% 6 60% 5 50% 4 40% 3 30% 2 20% 1 10% 0 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources : eMBS, Freddie Mac Primary Mortgage Market Survey (PMMS), and Urban institute 12
The lock in effect is powerful--higher rates do impact mobility Percent of homebuyers that sell, by length of ownership: 1976-2016 Rates down 1.5% Rates up 1.5% Percent 8% 7% 6% 5% 4% 3% 2% 1% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Number of years (from 1976) Source : CoreLogic 13
Payment rates may slow more than expected as geographic mobility is down Percent Movers Within Past Year – Renters Percent Movers within Past Year--Owners Percent 10 40 9 35 8 30 7 25 6 20 5 4 15 3 10 2 5 1 0 0 1988 1992 1996 2000 2004 2008 2012 2016 1988 1992 1996 2000 2004 2008 2012 2016 Source : U.S. Census Bureau, Current Population Survey Source : U.S. Census Bureau, Current Population Survey 14
30 – year prepayment speeds by coupon 3 Month CPR 6 Month CPR 12 Month CPR Ginnie Mae Fannie Mae Freddie Mac Ginnie Mae Fannie Mae Freddie Mac Ginnie Mae Fannie Mae Freddie Mac 2.5 12.68 6.64 5.09 11.8 6.02 5.04 12.78 7.41 6.46 3 10.21 7.38 6.91 9.88 7.10 6.59 14.99 10.74 10.43 3.5 14.68 10.72 10.01 15.26 11.74 11.16 20.93 17.20 16.85 4 21.04 14.86 14.85 22.07 17.03 16.95 24.42 22.59 22.61 4.5 19.84 16.82 16.96 20.54 19.30 19.64 23.00 22.83 23.42 5 19.70 20.35 19.86 20.88 21.47 21.75 22.72 22.89 23.43 5.5 19.44 21.65 22.67 18.82 22.61 23.51 20.01 23.36 23.77 Sources: Freddie Mac Primary Mortgage Market Survey, Mortgage Bankers Association, and Urban Institute. 15
FHA Captures the Riskier Borrowers Channel Choice by Credit Score When Down Payment is 3 - 4.99 Percent FHA GSE 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% <640 640-659 660-679 680-699 700-759 760+ Channel Choice by Credit Score When Down Payment is 5 - 19.99 Percent FHA GSE 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% <640 640-659 660-679 680-699 700-759 760+ Channel Choice by Credit Score When Down Payment is 20 Percent or More FHA GSE 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% <640 640-659 660-679 680-699 700-759 760+ So Source: : eMBS and the Urban Institute. Note ote: : 2016 purchase and refinance mortgage . 16
FHA more important for FTHB and Minorities GSEs FHA GSEs and FHA First-time homebuyer 90% 82.4 80% 70% 60% 60.0 50% 47.2 40% 30% 20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 First-Lien Originations by Race/Ethnicity Conventional Government 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Asian African American Hispanic Non-Hispanic White Sources : eMBS, Federal Housing Administration (FHA ), HMDA and Urban Institute. Note: All series measure the first-time homebuyer share of purchase loans for principal residences. 17
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