Question

During the financial crisis of 2008 the Federal Reserve bought mortgage backed securities. Why did they do this? Were the mortgage backed securities successful or not?

Answer 1

Mortgage Backed Securities
Mortgage Backed Security is a type of investment which is similar to bonds and the security is of a bundle of home loans from the banks who issues them. MBS, since similar to investment in bonds, investor gets returns periodically. Banks work actually as a mediator in issuing Mortgage Backed Security. Investor lends money on the security and homebuyers borrow that. MBS had huge impact on the financial crisis happened in 2008. Currently, mortgages must have originated and regulated by government, private financial companies or by authorized financial institution.
The Federal Reserve bought back MBS so as to stimulate the economy from the crisis that faced. The recession faced because of inefficient distribution and consequences faced by MBS, the Federal Reserve bought it back to increase the supply of funds in the economy and to encourage economic activities. The increased interest rate prior to the crisis has to be reduced by pumping money to the economy. Giving investors their money back through buying the securities back reduced the effect of crisis in the economy. The rapid increase in the house prices and growing demand of MBS encouraged banks to attract customers for lending money and jump into the market. Aggressive support given to the mortgage market reduced the rating of mortgage securities. Thus increase demand for funds which collapsed the housing market creating the asset less valued than their debts. The credit crunch happened then was tried to be reduced by the Federal Reserve through buying back the mortgage securities which encourages investments back in the economy.