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Quantitative Easing and Agency MBS Investment and Financing Choices by Mortgage REITs

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  • W. Scott Frame
  • Eva Steiner

Abstract

An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) and that are principally funded with repo debt. We first show that Agency MREIT asset growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We then document that Agency MREITs increased financial leverage during the later stages of QE, consistent with “reaching for yield” behavior. However, Agency MREITs countered the heightened solvency risk by extending repo maturity and increased hedging of their funding costs to reduce liquidity and interest rate risk. The findings suggest that research linking QE to increased credit risk-taking should account for contemporaneous changes in financing choices and risk management.

Suggested Citation

  • W. Scott Frame & Eva Steiner, 2020. "Quantitative Easing and Agency MBS Investment and Financing Choices by Mortgage REITs," Working Papers 2020, Federal Reserve Bank of Dallas, revised 27 Apr 2021.
    • Handle: RePEc:fip:feddwp:88322
    DOI: 10.24149/wp2020r1
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    More about this item

    Keywords

    Quantitative Easing; Risk Taking; GSEs; Mortgages; Agency MBS;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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