Agency MBS Purchase
First, let's break down an "MBS." MBS stands for "mortgage-backed securities." These are financial instruments, kind of like bonds, backed by people's home mortgages.
The second thing we have to deal with here is the word "agency." An agency MBS is one issued by one of the so-called government-sponsored entities, or GSEs. These are companies that were created by Congress, though not explicitly backed by the government, meant to foster home ownership. There are three of these GSEs: the Government National Mortgage Association, also called Ginnie Mae; the Federal Home Loan Mortgage Corporation, also called Freddie Mac; and the Federal National Mortgage Association, or Fannie Mae to its homies.
So far so good. Agency MBS are mortgage-backed securities issued by one of these government sponsored entities, like Fannie Mae and Freddie Mac. The "purchase" part of the term "agency MBS purchase" should be easy, right? Just buy a few of these bad boys and we're done.
It's a little more complicated, just because "agency MBS purchase" tends to refer to a specific historical moment.
Back in the mid-2000s, the housing market seemed like it would remain strong for the rest of anyone's natural life. In this environment, banks and other financial institutions bet heavily on MBSs. They owned a lot of them, and everyone assumed they were super-safe. Most people would always be able to make their mortgage payments, right?
Unfortunately, the good times didn't last. By 2007, the housing bubble had begun to burst and by 2008, the economy was in full panic. The MBSs became essentially worthless, or at least got to the point where no one would buy them. Because they had bet so heavily on these things, or were in business with people that did, Wall Street banks either went bankrupt or seemed poised to do so.
The government stepped in with a series of measures over the next few years to try to stabilize the market. It's in this context that the big, historical agency MBS purchase took place. The steps the government took to prop up the economy included a program run by the Federal Reserve to buy a large amount of MBSs in order to unfreeze the market for these assets. Ultimately, the Fed's $1.25 trillion MBS purchase program ran from early 2009 until early 2010.
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Finance: What is Collateralized Mortgage...65 Views
Finance a la shmoop what is a collateralized mortgage obligation or
CMO all right people well this is a GMO and this is a CMO yeah it's a bunch of
mortgages in one investment vehicle pot like mortgage Stone Soup not nearly as [Mortgage stones in a bowl of soup]
exciting is that that man-eating plant over there
so yeah just a bunch of mortgages that are packaged together when banks and
investors package mortgages together well they can treat them like they're a
big fat indexed bond fund because these groups of mortgages while they pay
interest ie the interest comes from the people who are actually paying off their
mortgages so why would you collateralize a mortgage obligation anyway answer risk
by packaging lots and lots of mortgages together the theory was that well as a [CMO boxes on a conveyor belt]
whole they would create a much less volatile environment than the former
alternative of having tens of thousands of individual mortgages many of which at
any given time were you know in do rest as people were dead beating and not [Man playing video games]
paying what they promised to pay back right well collateralizing this group
meant simply placing all of them into one investment vehicle that could be
bought and sold as if it were in ETF or individual closed end fund but Wall
Street being Wall Street where greed is good until it's not abused the notion of [Boxing gloves punch collateralized]
collateralized mortgages and actually applied the notion of collateral against
them pledging as collateral the equity in these mortgages or packages of
mortgages and then borrowing against them so it's like leverage on leverage,
highly volatile and this is sort of like the brilliant idea of the fraternity [Man walking along]
social chairman sending the pledges to get graham crackers marshmallows and
chocolate when he sees his you know couch is on fire yeah like why wouldn't [People carrying snacks and a couch on fire appears]
he just put it out like what was he imbibing there all right well in fact
this is more or less what happened in the mortgage meltdown of 2008 and 9 and
it was helium inside of the couch that exploded in the form of many of these [Helium explodes on a couch]
mortgages becoming insolvent and as one mortgage went bad
well it caused a chain reaction of panic up and down the economic food chain
which resulted in the near bankruptcy of the United States financial system
basically the people who pulled together these CMOS forgot what the O stands for [Man walking along the street and plant eats him]
oh dear, oh my
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