Why It Matters

The agency mortgage-backed securities (MBS) market is without a buyer of last resort for the first time in more than a quarter of a century. Fannie Mae and Freddie Mac played the role before being placed into conservatorship in 2008 and were replaced by the Federal Reserve during its quantitative easing effort in the wake of the financial crisis. Now that the Federal Reserve has retreated from the role as well, there is no large buyer positioned to step in to buy agency MBS early in times of disruption, leading to greater market instability and volatile mortgage rates. The policy question this raises is what, if anything, policymakers should do about it.

We Assess the Impact and Consider the Options

We compare market disruptions that occurred when the market had a buyer of last resort with one in which it did not, to quantify the cost of a buyer’s absence. We then assess the possibility of the Federal Reserve or Fannie Mae and Freddie Mac returning to the role, concluding that neither is well positioned for the role now. The Federal Reserve’s mandate is too broad, and Fannie Mae and Freddie Mac’s mandate is too ill defined while their future is in limbo.