Reverse Repos Called Most Optimistic QE3 Unwinding Move for MBS

When it comes to possible ways for the Federal Reserve to unwind its mortgage-backed securities purchases, reverse repurchase sales are the most optimistic path for MBS, a Wall Street managing director told attendees at the Mortgage Bankers Association's National Secondary Market Conference Wednesday.

Deustche Bank managing director Steven Abrahams reminded the attendees during the panel discussion on the Fed's third quantitative easing program that the Fed "may not have to sell," citing Fed minutes and statements earlier this year by Fed chair Ben Bernanke during his semi-annual Humphrey Hawkins testimony and by Fed Gov. Elizabeth Duke.

But ultimately, "We may not be able to escape the impact of a Fed exit," he said.

Seth Carpenter, senior associate director, monetary policy affairs, Federal Reserve System, said during the panel moderated by MBA’s vice president, research and education, Michael Fratantoni, that the statements by the Fed chair and Duke are an "important point" in analyzing considerations involved in how purchases might be unwound, something he and others at the Fed analyzed in a report late last year that examines how the unwinding might affect the Fed’s balance sheet and payments to the Treasury.

In a reverse repo, the Fed would let the market “borrow” the bonds in return for cash, selling them using an arrangement where there is simultaneously a “sale” of the MBS and an agreement to buy them back later at a set price.