Fed Flub on MBS 'Guaranty' Fixed Hours Later

Was it wishful thinking by the Federal Reserve?


Federal Reserve Chairman Ben Bernanke's Jackson Hole speech caught the eye of J.P. Morgan Chase & Co.'s (JPM) mortgage strategists, but not only because of quantitative-easing talk.
Matthew Jozoff zeroed in on a footnote in the text with a curious description of the agency mortgage-backed securities that the Fed has been stocking up on for years. There, the Fed initially described the MBS and debt of the government-sponsored enterprises as "explicitly guaranteed by the U.S. government" since August 2008.
The problem was that MBS of the GSEs, or Fannie Mae (FNMA) and Freddie Mac (FMCC), have never been explicitly guaranteed, even after the two companies were seized by the government in 2008, and backed with capital from the Treasury. It's more than just semantics to the $5 trillion market, where many investors--especially foreign ones--will only buy MBS issued by the Government National Mortgage Association, known as Ginnie Mae, for their "full faith and credit guaranty of the United States government."
"GSE MBS have not been explicitly guaranteed. If that were the case, it would be a big deal, but it's not happening," said Mr. Jozoff, who expected that the Fed would revise the footnote.
Fed officials apparently noticed the flub, and within hours replaced the footnote in the speech posted on the Fed's website with: "Since August 2008, Fannie Mae and Freddie Mac have been in government conservatorship with capital support provided by the U.S. Treasury."
A Fed spokesman wasn't immediately available to comment.
MBS are a significant part of the Fed's fattened balance sheet. It has amassed a portfolio of more than $850 billion of MBS through multiple rounds of quantitative easing, a program that traders expect will be expanded after Mr. Bernanke noted an accommodative stance in Friday's speech. It currently reinvests proceeds of its MBS back into that market, focusing primarily on Fannie Mae and Freddie Mac securities over higher priced Ginnie Mae bonds that securitize loans made through Federal Housing Administration and Veterans Administration programs.
Buying MBS helps keep mortgage rates low because the lion's share of all U.S. residential loans are ultimately funded through investor purchases of the securities.
Prices on Ginnie Mae securities are near record highs relative to other agency MBS, partly due to the government guarantee. Ginnie Mae 3.5% MBS trade at 108-3/32 cents on the dollar, compared with 105-29/32 on the similar Fannie Mae bonds, according to Credit Suisse.