The Federal Reserve's commitment to purchasing mortgage-backed securities should expire soon to keep the central bank from re-inflating the government-dependent housing finance model, according to Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.
Lacker made that suggestion while speaking at the Shadow Open Market Committee Symposium on Tuesday. His speech is in line with previous comments in which Lacker warned against the Fed's committment to buy $40 billion worth of MBS each month on an open-ended basis. In fact, he said it would put consumers at risk of inflation, steering credit artificially towards the housing market.
"To the extent that purchases of private claims have any effect, they do so by distorting the relative cost of credit among different borrowers," said Lacker. "Such differential effects are unlikely to be beneficial, on net, unless borrowers in the favored sector would otherwise face artificially high rates. I think it's difficult to make this case for agency MBS, a sector that historically has benefited from heavy subsidies, which arguably contributed to dangerously high homeowner leverage," he added.
Lacker essentially said pushing interest rates extremely low to help conforming mortgage borrowers ignores the potential for negative effects in other borrowing segments.
"Moreover, purchasing agency MBS encourages the continuation of a housing finance model based heavily on government-sponsored enterprises, at a time when the housing sector would be better served by a new model that relies less on government-credit subsidies," he concluded.