Understanding Agency MBS Purchases: Overview, History, and Benefits

What Is Agency MBS Purchase?

An agency MBS purchase refers to the Federal Reserve's purchase of mortgage-backed securities (MBS) issued by government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and Ginnie Mae.

These programs, launched during major financial crises like 2008 and 2020, aimed to stabilize housing and mortgage markets by lowering long-term interest rates and increasing liquidity. Through these purchases, the Fed helped support lending, sustain homeownership, and strengthen the broader U.S. economy.

How Agency MBS Purchases Work

It is common practice for banks to sell a large percentage of their active mortgages to participants in the secondary mortgage market, including institutional investors, private firms, and governmental and quasi-governmental entities. These participants purchase mortgages from banks and then package them into pools—a process known as securitization—to create financial securities that can be sold in the open market to investors.

Each pool constitutes a security known as a mortgage-backed security (MBS), which represents an interest in the pool of mortgages. Like bonds, MBS make coupon payments to investors. An agency MBS is an MBS issued by one of three quasi-governmental agencies: The Government National Mortgage Association (GNMA or Ginnie Mae), the Federal National Mortgage Association (FNMA or Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Agency MBS purchases are carried out by the New York Fed’s Open Market Trading Desk as authorized by the Federal Open Market Committee (FOMC). The agency MBS securities are purchased in their portfolio, the System Open Market Account (SOMA). The trading desk reinvests principal payments from these holdings into newly-issued MBS from Fannie Mae, Freddie Mac, or Ginnie Mae. Purchases of agency MBS increase the quantity of reserve balances in the banking system.

Though these agencies all began as government-backed operations, Fannie Mae and Freddie Mac were both subsequently privatized. As a result, prior to 2008 their MBS (and other obligations) were explicitly not guaranteed by the U.S. Treasury, and thus did not meet the Fed’s criteria to be eligible assets to purchase and hold on its balance sheet. 

The Evolution of Agency MBS Purchases

Agency MBS Purchases During the Great Recession

Following the credit crisis that started in 2007, the FOMC sought to prop up the banking system and ease credit conditions for borrowers by engaging in a series of new, unconventional monetary policies. These included quantitative easing (QE), to flood the financial system with new liquidity, and targeted credit facilities, to support the prices of specific asset classes and the ability of specific types of institutions to raise funds.

The Fed's $1.25 trillion agency MBS purchase program served both these purposes. It constituted a major fraction of the Fed’s QE policy, with a massive injection of new bank reserves to purchase the MBS, and targeted support for the GSEs themselves and the prices of their issued securities. 

This policy was carried out in concert with the U.S. Treasury’s Troubled Asset Relief Program (TARP) to bail out banks and other holders of MBS that had fallen in value amid the wave of mortgage defaults during the crisis, and its direct bailout of Fanny Mae and Freddie Mac, both initiated in the fall of 2008. The Treasury’s conservatorship of the GSEs meant that their securities now had the explicit backing of the Treasury, enabling the Fed to purchase them under its normal prudential rules.

Financial institutions (FIs) were then able to repay loans and other payments taken out under TARP by selling agency MBS to the Fed at above-market prices. Essentially, the Fed's $1.25 trillion MBS purchase indirectly monetized Treasury spending under TARP and the GSE bailout.

Agency MBS Strategy Amid COVID-19

In 2020, in response to the financial and economic chaos induced by widespread government lockdown orders during the COVID-19 outbreak, policymakers again took action.

The Fed resurrected many of the financial bailout measures that it had instituted during the 2008 financial crisis, including QE, special lending facilities, and agency MBS purchases. On March 23, 2020, the central bank announced its intent to purchase unlimited quantities of Treasury and agency securities to support its QE program.

Advantages of Agency MBS Purchases

The goal of the agency MBS purchase program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets. When the Fed commenced these purchases in Jan. 2009, the U.S. and global equity markets were trading at multiyear lows amid an intense credit crunch, and there was widespread concern about the global economy heading for a depression.

The objective was to reduce long-term interest rates. When an entity purchases a significant amount of bonds in the market, it increases the price of the bonds. Bond prices and their yield/interest rate have an inverse relationship. So as the price goes up, the interest rate will go down. Lower interest rates stimulate the economy as it makes borrowing cheaper. 

In the end, the MBS purchase program proved to be instrumental in providing price support and dissipating the panic that had gripped many market participants. By the time the Fed completed the purchase program in March 2010, the S&P 500 had appreciated significantly and global equity markets had been in full rally mode for over a year, perhaps exceeding the Fed's most optimistic expectations.

The Bottom Line

The Federal Reserve's agency MBS purchase program played an important role in stabilizing mortgage and financial markets during crises like the 2008 recession and the COVID-19 pandemic.

By lowering long-term interest rates and boosting liquidity, it supported lending and economic recovery. Its reinstatement in 2020 underscored its continued effectiveness, helping restore market confidence and contributing to the rebound in financial and equity markets.