It is difficult to state with certainty exactly how many ugly mortgage bonds have been purchased by the Federal Reserve. But if you put pencil to paper we can estimate the number. The published figures indicate there was a purchase of several hundred billion in these defective bonds when the financial collapse occurred. To be on the safe side we will use a figure of $300 billion. Since then the published articles indicate that the Fed has been purchasing bonds monthly. The amount of monthly purchases of the mortgage bonds appears to vary between $55 billion and $35 Billion. So if we use an average of $45 billion per month of mortgage bonds that have been purchased by the Federal Reserve. This has been going on for about 55 months. So the total monthly purchase of mortgage bonds is around $2,225 Billion or $2.225 Trillion. Hence the total purchases by the Fed could be reasonably estimated at $2.525 Trillion.
This means that the Federal Reserve owns a substantial bulk of the bonds issued during the mortgage meltdown. Questions abound. The Federal Reserve knows the bonds were defective in a number of respects. But they are purchasing those bonds for the express purpose of propping up the financial system and presumably getting those bonds out of circulation. The question is why did they purchase these bonds from the banks? The banks were merely the intermediaries that created the REMIC trusts that issued the bonds. So are the he trust beneficiaries receiving this money? Nothing in the public domain indicates that the investors were paid by the banks that received this money. Since it was a purchase the bonds still exist which means that the largest investor in many trusts is the Federal Reserve. Is the Fed getting Servicer advances?
But the largest question on my mind is why the Federal Reserve as an agency has not addressed the fundamental economic problem of economic inequality that was caused by a deeply flawed system of defrauding investors and borrowers into entering into loan deals that were (a) different from each other and (b) could never work because of the values used for the loan and property?
If you take the number of Foreclosures that have been rubber stamped through the system plus the bond purchases by the Federal Reserve and add them together, the amount of “help” received by the banks is around $3.5 Trillion. The amount of help given to homeowners is a tiny fraction of that amount. If the Federal Reserve wants economic growth, it should use its potential influence as the largest investor in the bonds to mandate settlements that make economic sense to both investors and to borrowers. This correction stops the financial aid to banks who are keeping the money. But it stimulates investment and incidence in the financial system and the capability of the middle class to spend and stimulate the economy.
The main obstacle to fair settlements is the fact that we are still going through intermediary banks who we know have committed widespread fraud and whose balance sheets and income statements are being artificially inflated by showing values and profits that should not have been allowed. No new law is required. When you defraud investors the normal result upon discovery is restitution to those investors. If the investors (including the federal Reserve) are satisfied and seek no further payment on the debt due to these lenders, then a pro rata reduction of the debt supposedly owed by homeowners is merely the corresponding bookkeeping entry. The federal Reserve has an obligation to use its influence to force these settlements avoiding further displacement and further erosion of middle class wealth.
Filed under: foreclosure