US MBS Selloff – The Canadian Impact

US MBS Selloff

In 2008, when the housing crisis in the U.S. was threatening to bring down the global economy, one of the moves the U.S. government made to temper the damage was to buy up an unprecedented $1.25-trillion worth of mortgage-backed securities (MBS). The taxpayers footed the bill for the purchase, which helped bail the nation’s banks out of trouble; back then, MBS were mostly owned by banks and financial institutions and in large part were made up of shaky home mortgages that were in arrears.

Without the government stepping in, the banks that held those MBS would have failed and created a chain effect that could have brought down the U.S. banking system.

Related Read: Why Homeowners Should Care About Higher Fees for MBS in Canada>

A Step Toward Recovery

Fast forward eight years and the U.S. economy is on much stronger ground. Home prices have started to climb and many Americans are back at work. The U.S. jobless rate is currently 5 per cent, and the Federal Reserve has scaled back the quantitative easing and monetary policy measures used during crisis recovery. Now, the sale of its share of MBS further signals a return to normalcy. Federal Reserve Chairperson Janet Yellen recently stated, “At the present time, we hold a large quantity of mortgage-backed securities. Eventually we would like to get back to an all Treasury portfolio.”

Yellen’s comments were made while speaking on a panel gathering at International House in New York, and was joined by former Fed Chairmen Ben Bernanke, Alan Greenspan and Paul Volcker. The unusual meeting was presumably held to dispel worries that the U.S. is heading back towards recession. Yellen added during the panel “this is an economy on a solid course, not a bubble economy.”

A Time for Optimism?

The move to buy MBS, or the bond buy-back stimulus program as it’s sometime referred to, has been a boon for U.S. taxpayers thanks to interest earned from the program the U.S. Federal Reserve in 2015, which sent a record $97.8 billion in profits to the Treasury Department.

It almost seems like a bad investment move to sell the MBS the FED owns, but Yellen’s revelation is good news. It shows there is confidence that the housing market can survive without government intervention and indicates, though some might argue otherwise, that the much criticized decision by the Fed to buy MBS in 2008 was the right move.

Add to this the Fed’s decision to raise rates in December for the time since before the 2008 financial crisis is also a solid sign that things are looking better for our American cousins. As Canada relies heavily on the U.S. for trade, an improving economic climate in the U.S. is good news for Canada’s GDP. Currently, Canada is struggling with a low dollar not seen in 11 years, the lower price of oil and slower economic recovery than first expected. The U.S. recovery story is our recovery story – and Canadian monetary policy makers will be sure to keep a close eye on it while setting the cost of borrowing here.

Related Topics

Economic News / Mortgage News / Mortgages

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