Former FRB Governor: Fed Lacking Exit Strategy on MBS Effort

The Federal Reserve Board has no particular exit strategy in mind when it comes to leaving the MBS market once it reaches the $1.25 trillion net purchase goal it set for 2009, said former FRB governor Randall Kroszner. Speaking at the Mortgage Bankers Association's National Secondary Market Conference, Mr. Kroszner said the central bank will "do whatever it takes" to keep rates in check until the MBS market returns to some semblance of normalcy. For the most part, the central bank is now the secondary market for mortgage-backed securities issued by Fannie Mae and Freddie Mac, having purchased more than $300 billion worth of the bonds in the first quarter. But the MBA is worried that when the Fed reaches its goal, its exit from the market will cause mortgage rates to shoot upward. Mr. Kroszner, who spent three years at the central bank before returning to the University of Chicago in January, said, "The real challenge is to thread the needle. Whether the Fed will purchase more or less will depend on the facts and circumstances at the time." If the central bank is satisfied by 2010 that the market is coming back, it will reduce it purchases, said Mr. Kroszner, who was a member of the President's Council of Economic Advisors from 2001 to 2003, and "mortgage rates should rise at a normal pace."