deeply into monetary policy generally, i would like to make a few observations about the efficacy and costs of mbs purchases specifically. in doing so, i want to reiterate that these are my views and may not be in accord with those of my colleagues on the fomc. in many ways, purchases of mbs have the same downward effect on the general level of long - term interest rates as purchases of other longer - term securities. but, in addition, purchases of agency mbs reduce the spread between treasury and mbs yields and thus, compared with purchases of treasury securities, have somewhat larger effects on mortgage rates. this larger effect was especially true in the first round of purchases in 2009 when investor uncertainty about the degree of government support for agency mbs was quite high. 13 mbs purchases also influence mbs yields by affecting the cost of hedging the risk ( known as convexity risk ) that mortgages prepay more quickly when rates decline or more slowly when rates increase, because, unlike some mortgage market investors, the federal reserve does not hedge such risk. lower mbs yields result in lower mortgage rates, which can spur the economy through elevated home - purchase and refinancing activity. but this effect is not yet fully transmitted to the economy, as the difference between mbs yields and mortgage rates is still somewhat wide and, as i discussed earlier, tight credit has prevented many households from accessing the low rates. any improvement in credit conditions would thus act to improve the efficacy of mbs purchases. similarly, policies that constrain mortgage lending or increase its cost would reduce efficacy. i think the additional impetus to housing from mbs purchases is appropriate for at least three reasons. first, the housing market has suffered extraordinary damage during the past few years. second, even with the recent positive signs, housing investment has contributed far less to economic growth than in a typical recovery. and, third, even as terms and standards on other types of credit have eased, standards for mortgage credit remain quite tight. while the purchase of agency mbs has some special efficacy in supporting housing markets, the peculiarities of the mbs market itself present some potential market functioning issues that bear monitoring. the mbs market is not as deep or as liquid as the treasury market, and the total size of the market is not growing as quickly. as refinancing activity slows, the gross pace of new mbs issuance could slow as well, and federal reserve purchases at the

elizabeth a duke : comments on housing and mortgage markets speech by ms elizabeth a duke, member of the board of governors of the federal reserve system, at the mortgage bankers association mid - winter housing finance conference, avon, colorado, 8 march 2013. * * * since joining the board in 2008 amid a crisis centered on mortgage lending, i have focused much of my attention on housing and mortgage markets, issues surrounding foreclosures, and neighborhood stabilization. today i am pleased to provide some comments about the outlook for housing and mortgages. before i proceed, i should note that the views i express are my own and not necessarily those of my colleagues on the board of governors or the federal open market committee ( fomc ). i think the evidence is pretty clear that a recovery in the housing market is finally under way. national house prices have increased for 13 consecutive months and are now 10 percent higher than at their trough in december 2011. 1 construction activity has also picked up. housing starts and permits are still far below their peaks but have risen by about one - third over the past year, and homebuilder sentiment has improved notably. 2 new and existing home sales have increased. in national surveys, households report that low interest rates and house prices make it a good time to buy a home ; they also appear more certain that house price gains will continue. 3 and real estate agents report stronger traffic of people shopping for homes. 4 the open question is whether this positive trend is sustainable. when i look at the factors driving recent improvement and those that have inhibited housing recovery through the downturn, i conclude that recent gains in the housing market will continue and perhaps even strengthen. my main hesitation with this forecast is that mortgage credit conditions remain quite tight for many would - be borrowers, and i suspect that the easing of these conditions will be a slow and gradual process. in particular, i expect demand to come from a pickup in new household formation, but i also recognize that these households may be the very population that faces especially tight credit conditions. i will return to the subject of mortgage credit later in my talk. housing market overview and outlook last year ’ s house price gains were achieved in an environment largely defined by historically unusual factors : a large number of underwater homeowners, which have effectively reduced the supply of properties for sale ; the fact that foreclosed properties continue to represent an outsized, although gradually decreasing, share of sales transactions ; and strong demand on the part of investors