The news this morning said the Fed is spending $40 billion/month (yes, per month) buying mortgage backed securities in what it says will nurse the housing market back to health. That’s $4.8 trillion per year, on top of an already huge debt level. To do what? Relieve the pressure on banks holding bad notes so the banks can lighten up on lending requirements?
Might I suggest a more insidious thought? This may be another form of helping not the homeowners or the housing market, but the banks.
Let’s say bank ABCF (American Bank of Chasing Fargo) services a NOTE which has been broken and sold as a Mortgage Backed Security (MBS). Parts of the note are owned by hedge funds no longer existent. While this is a win for the bank as they have nowhere to send those funds and can just put them aside for when the NOTE owners turn up, it becomes problematic if the bank needs to foreclose.
Increasingly, homeowners who have fallen on hard times are seeking legal counsel about their properties. Savvy attorneys are asking for the documentation about who is legally entitled to foreclose, and it’s putting the banks in a precarious position. It is difficult to obtain foreclosure directives from a non-existent entity.
If the Fed were to buy those mortgage backed securities ($40 billion/month), when John Doe’s attorney asks who owns the MBS, the answer is increasingly, the Fed.
This is a win for the bank, who can foreclose and satisfy investors, retaining the property and reselling for a profit. It is a win for the Fed because as one of the investors, it receives payout. It is an additional win for the Fed if some of the previous investors no longer existed, they receive more of the payoff.
The only one who doesn’t win is the homeowner, who once again has the system gamed against him or her.