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How Does the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates?

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  • Diana Hancock
  • Wayne Passmore

Abstract

type="main"> We conduct an empirical analysis of the Federal Reserve's large-scale asset purchases (LSAPs) on mortgage-backed securities (MBS) yields and mortgage rates. We estimate a cointergrated, error-correction model that links Federal Reserve securities purchases and stocks of Treasury and MBS securities to equilibrium MBS yields and mortgage rates. The Federal Reserve's accumulation of MBS and Treasury securities lowered MBS yields and mortgage rates by more than what would have been suggested by changes in market expectations alone, suggesting that portfolio rebalancing effects of LSAPs are an important consideration for monetary policy transmission. Our estimates also suggest that the Federal Reserve must hold a substantial market share of agency MBS or of Treasury securities to significantly lower MBS yields and in turn significantly lower mortgage rates.

Suggested Citation

  • Diana Hancock & Wayne Passmore, 2015. "How Does the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 855-890, November.
  • Handle: RePEc:bla:reesec:v:43:y:2015:i:4:p:855-890
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    File URL: http://hdl.handle.net/10.1111/1540-6229.12109
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    Cited by:

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    2. Andrew J Fieldhouse & Karel Mertens & Morten O Ravn, 2018. "The Macroeconomic Effects of Government Asset Purchases: Evidence from Postwar U.S. Housing Credit Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 133(3), pages 1503-1560.
    3. Andreas Fuster & Stephanie Lo & Paul S. Willen, 2017. "The time-varying price of financial intermediation in the mortgage market," Staff Reports 805, Federal Reserve Bank of New York.
    4. Wayne Passmore & Alexander H. von Hafften, 2017. "Improving the 30-Year Fixed-Rate Mortgage," Finance and Economics Discussion Series 2017-090, Board of Governors of the Federal Reserve System (U.S.).
    5. Wang, Ling, 2019. "Measuring the effects of unconventional monetary policy on MBS spreads: A comparative study," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 235-251.
    6. Wayne Passmore & Alexander H. von Hafften, 2018. "Financing Affordable and Sustainable Homeownership with Fixed-COFI Mortgages," Finance and Economics Discussion Series 2018-009, Board of Governors of the Federal Reserve System (U.S.).
    7. Steve Sharpe & Shane Sherlund, 2016. "Crowding Out Effects of Refinancing on New Purchase Mortgages," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(2), pages 209-239, March.
    8. W. Scott Frame, 2015. "Introduction to Special Issue: Government Involvement in Residential Mortgage Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 807-819, November.
    9. Gang Wang, 2019. "The Effects of Quantitative Easing Announcements on the Mortgage Market: An Event Study Approach," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 7(1), pages 1-30, February.

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