Help the Fed Get Out of the Mortgage Business

American Banker
2 minute read | May.07.2013

In 2008, when our nation's housing finance system imploded, the Federal Reserve was forced to step in as "lender of last resort" to America's homeowners. Five years later, the Fed remains the principal source of funding for home mortgages, buying mortgage-backed bonds issued by Fannie Mae and Freddie Mac (both now in conservatorship) and in the process adding trillions of dollars in mortgage securities to the central bank's balance sheet.

As a result, the Fed's balance sheet has taken on some of the characteristics of an old-time savings and loan association. Looking back, it will be recalled that when inflation ticked up, having borrowed short and lent long, the S&Ls got caught in an interest rate bind that led to the demise of their industry over time. The Fed does not appear to be implementing a strategy to hedge the interest rate risks associated with its mortgage-backed securities portfolio. It may not need to, because it is not subject to the same accounting rules that the S&Ls were. However, whether the Fed will be insulated from the risks associated with lending long in a low interest rate environment is yet to be determined. We are in uncharted territory.