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Agency MBS Purchase

Agency MBS Purchase

What Is Agency MBS Purchase?

Agency MBS purchase is the purchase of mortgage-backed securities (MBS) issued by government-sponsored ventures (GSE) like Fannie Mae, Freddie Mac, and Ginnie Mae, the last option of which is a completely claimed government corporation. The term is most commonly utilized in reference to the U.S. Federal Reserve's (Fed) $1.25 trillion program to purchase agency MBS, which started on Jan. 5, 2009, and was completed on March 31, 2010, to relieve the effects of the 2007-2008 financial crisis.

The program was restarted on March 15, 2020, during the COVID-19 crisis.

Understanding Agency MBS Purchase

It is common practice for banks to sell a large percentage of their active mortgages to participants in the secondary mortgage market, including institutional investors, private firms, and governmental and semi governmental elements. These participants purchase mortgages from banks and afterward package them into pools — a cycle known as securitization — to make financial securities that can be sold in the open market to investors.

Each pool comprises a security known as a mortgage-backed security (MBS), which addresses an interest in the pool of mortgages. Like bonds, MBS make coupon payments to investors. An agency MBS is a MBS issued by one of three semi governmental agencies: The Government National Mortgage Association (GNMA or Ginnie Mae), the Federal National Mortgage Association (FNMA or Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Agency MBS purchases are carried out by the New York Fed's Open Market Trading Desk as authorized by the Federal Open Market Committee (FOMC). The agency MBS securities are purchased in their portfolio, the System Open Market Account (SOMA). Principal payments received from these holdings are reinvested by the trading desk in recently issued MBS securities backed by Fannie Mae, Freddie Mac, or Ginnie Mae. Purchases of agency MBS increase the quantity of reserve balances in the banking system.

However these agencies all started as government-backed operations, Fannie Mae and Freddie Mac were both therefore privatized. Thus, prior to 2008 their MBS (and different obligations) were explicitly not guaranteed by the U.S. Treasury, and accordingly didn't meet the Fed's criteria to be eligible assets to purchase and hold on its balance sheet.

History of Agency MBS Purchase

The Great Recession

Following the credit crisis that began in 2007, the FOMC tried to prop up the banking system and straightforwardness credit conditions for borrowers by taking part in a series of new, unconventional monetary policies. These included quantitative easing (QE), to flood the financial system with new liquidity, and targeted credit facilities, to support the prices of specific asset classes and the ability of specific types of institutions to raise funds.

The Fed's $1.25 trillion agency MBS purchase program filled both these needs. It comprised a major fraction of the Fed's QE policy, with an enormous injection of new bank reserves to purchase the MBS, and targeted support for the GSEs themselves and the prices of their issued securities.

This policy was carried out working together with the U.S. Treasury's Troubled Asset Relief Program (TARP) to bail out banks and different holders of MBS that had fallen in value in the midst of the wave of mortgage defaults during the crisis, and its direct bailout of Fanny Mae and Freddie Mac, both initiated in the fall of 2008. The Treasury's conservatorship of the GSEs implied that their securities presently had the explicit backing of the Treasury, empowering the Fed to purchase them under its normal prudential rules.

Financial institutions (FIs) were then able to repay loans and different payments taken out under TARP by selling agency MBS to the Fed at above-market prices. In effect, this implied that the Fed's purchase of $1.25 trillion in agency MBS likewise addressed the indirect adaptation of Treasury spending under TARP and the GSE bailout.


In 2020, in response to the financial and economic chaos induced by broad government lockdown orders during the COVID-19 flare-up, policymakers again made a move.

The Fed revived a large number of the financial bailout measures that it had organized during the 2008 financial crisis, including QE, special lending facilities, and agency MBS purchases. On March 23, 2020, the central bank announced its intent to purchase unlimited amounts of Treasury and agency securities to support its QE program.

Benefits of Agency MBS Purchase

The goal of the agency MBS purchase program is to offer help to mortgage and housing markets and to foster improved conditions in financial markets. At the point when the Fed started these purchases in Jan. 2009, the U.S. furthermore, global equity markets were trading at long term lows in the midst of an extraordinary credit crunch, and there was boundless concern about the global economy heading for a depression.

The objective was to reduce long-term interest rates. At the point when an entity purchases a lot of bonds in the market, it increases the price of the bonds. Bond prices and their yield/interest rate have an inverse relationship. So as the price goes up, the interest rate will go down. Lower interest rates invigorate the economy as it makes borrowing less expensive.

Eventually, the MBS purchase program proved to be instrumental in giving price support and disseminating the panic that had grasped many market participants. When the Fed completed the purchase program in March 2010, the S&P 500 had appreciated essentially and global equity markets had been in full rally mode for north of a year, maybe surpassing the Fed's most hopeful expectations.


  • The program was restarted during the 2020 COVID-19 crisis.
  • A MBS is an investment security comprised of a bundle of home loans purchased from the responsible banks that pay investors coupons like bonds.
  • The goal was to forestall the bankruptcy of the government-sponsored elements by propping up the prices of their securities.
  • Agency MBS purchase normally alludes to the Fed's program to purchase $1.25 trillion worth of agency MBS from government-sponsored elements.