Fed Pulls Plug; World Does Not End

Fed Pulls Plug
Fed Pulls Plug

Tomorrow is the big day – the day the Federal Reserve pulls the plug on its purchases of mortgage-backed securities. Since December 2008, the Fed has kept the mortgage-backed securities market going by buying $1.25 trillion in securities issued by Fannie Mae, Freddie Mac and Ginnie Mae that no one else wanted. The massive program has helped keep home loan interest rates low during the financial crisis.

The securities -- comprised of residential mortgages bundled to diversify risk -- have long greased the wheels of the housing market. But after the subprime meltdown, investors viewed mortgage securities as unacceptably risky.

Starting tomorrow, private investors have to step back up to the plate to buy up the $1.5 trillion in mortgage-backed securities likely to be produced this year. Will they? Or will the government withdrawal leave a vacuum in the housing market that could push interest rates higher, as some fear?