Banks Won’t Be Able to Clean Up Fed’s Mortgage Mess

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Banks Won’t Be Able to Clean Up Fed’s Mortgage Mess

Don’t count on banks to rescue U.S. mortgage securities once the Federal Reserve leaves the market this spring.

Banks are typically massive buyers and a key support system for the $5 trillion agency mortgage-backed securities (MBS) market but are in no position to step up purchases this year, most strategists agree.

The Fed’s $1.25 trillion MBS buying began in January 2009 to help cut borrowing costs, revive housing and the economy.

Without a new lifeline, mortgage rates could rise, crimping demand in a housing market still groping for solid ground.

Fewer players, a push to mend balance sheets and an Obama administration plan to limit bank risk-taking could put the lid on bank MBS buying.

“The banking system is not capable of assuming the burden of supporting the mortgage market when the Fed stops doing it,” said Mustafa Chowdhury, head of U.S. rates and MBS strategy at Deutsche Bank in New York.

The number of banks reporting financial results to the Federal Deposit Insurance Corp fell to 8,099 at the end of the third quarter in 2009, compared to 8,533 at the end of 2007.

Banks load up MBS when yields on these long-term assets are high relative to short-term funding costs. Typically there is more cash to invest to enhance earnings when lending is light.

But with the number of banks down on several mega-mergers at the height of the financial crisis in 2008, and ongoing failures, their buying cannot be counted on to fill the Fed’s shoes. Those still standing are focus on rebuilding capital.

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