Worried about Tapering? Chris Bennett Says ‘Relax’

Chris Bennett is principal of mortgage industry hedge advisory firm Vice Capital Markets. He can be reached at cbennett@vicecapitalmarkets.com.

Chris Bennett

It’s not often the mortgage industry plays coy when it comes to certain topics, but currently, there are rumblings about the T-word – tapering. There’s a couple of misconceptions about tapering and what that might mean, especially for mortgages and mortgage-backed securities. Let’s clear those up.

As you may recall, the Federal Reserve Board began purchasing Treasuries and mortgage-backed securities in early 2020 to help stabilize the mortgage market at the onset of the COVID-19 pandemic. Given the current economic conditions and indicators of market stabilization, The Fed has announced that it will begin tapering these purchases starting sometime in the next three months, with an anticipated end date occurring in the middle of Summer 2022.

There’s been a lot of concern recently, especially in the originator community, about what’s going to happen when this occurs. It was a very big deal in March 2020 when The Fed came in with the equivalent of a bazooka and started buying $50 billion a day in mortgage-backed securities to kick-start the market. That, of course, didn’t have quite the intended effect, but once the program was quickly toned down, the market followed suit and has been relatively stable (or as stable as the market ever is) since then.

Current numbers show that, on average, The Fed is buying $5 billion a day in mortgage-backed securities, and originators are contributing a net new $5 to $7 billion a day in mortgage-backed securities from new originations. Thus, if the industry is already contributing roughly the same amount as The Fed’s buying, what’s going to happen when The Fed number goes from five billion eventually to zero?

Here’s the good news. The mortgage-backed securities market is actually way bigger than what the industry produces every month and what The Fed is buying. About $250 billion in mortgage-backed securities are traded every day; there are thousands of buyers in the MBS market right now, far more than just The Fed. So, not to worry – the people that will be buying these mortgage-backed securities once The Fed is out of the game are the same ones that have been buying them over the past 50+ years – pension funds, municipalities, insurance companies, retirement funds, any sort of entity that’s looking for a nice, stable, government-guaranteed return on their money.

Just because The Fed is going to be slowly removing that demand does not mean interest rates will go up or that existing demand will diminish. The last time tapering happened was in 2014. When The Fed announced its program, the 10-year yield was 3%. By the end of 2014 when it was done tapering, the 10-year yield had actually declined from 3% down to 2%. While the current 10-year yield in the 1.60s doesn’t leave much room for a repeat of 2014, the idea remains the same – the market has known this has been coming for a very long time, and it’s been baked into market expectations since far earlier this year.

The bottom line is this — rates may very well go up, but if they do it won’t be because The Fed stopped buying everything but the kitchen sink. The overall mortgage-backed securities market is 30 to even 50 times bigger than what The Fed is buying each day. So, rather than succumbing to the fear inspired by the T-word, the industry should strive to be like Frankie and think of the R-word – relax.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)