The Federal Reserve’s buying program for mortgage backed securities is set to officially end today. The conclusion of the program comes at the close of the first quarter of 2010, which has seen the size of mortgage backed bond issuance jump to $118.4 billion, compared to $33.5 billion in the first quarter last year.
The rebound in the mortgage backed securities market is dramatic considering just 16 months the market was on the verge of collapse. The magnitude of the rebound can be seen by the fact just one big bank issued more mortgage backed bonds in the first quarter this year, compared to all issuance in the period a year ago.
For the first quarter, Bank of America led all banks, accounting for roughly 38 percent of mortgage backed underwritings in the period. The bank conducted 21 issuances for a total of $45.4 billion.
The question now becomes if there are new buyers to step in and pick up the slack for the Federal Reserve’s exit. The Fed conducted a $1.25 trillion buy program that began in January 2009, providing liquidity to the market and helping keep yields low.
If sufficient buying does not come into the market, then yields will likely rise since banks will have a harder time attaining funds to originate mortgages. Interest rates rise because a better return needs to be offered in order to garner interest from investors to purchase mortgage backed securities.
