Also, if we were to sell assets in a rising rate environment, we could also experience some capital losses on these sales. In combination, depending on the future trajectory of short and long rates, remittances could even fall to zero for a period.13 There are several important points to make here. First, the potential impact of the purchase program on future Fed remittances was known at the onset of the program – we have no new information here. The outcome depends on how the economy evolves, how we respond, and whether we decide to sell long-dated assets in the portfolio or not. Second, it is important not to put excessive weight on the possibility of a period of zero remittances. Our mandate is economic not fiscal – our job is to return the economy to full employment and price stability. Moreover, in considering the fiscal consequences of our actions, what matters is not what happens to our remittances – that is far too narrow a perspective – but how our actions affect the federal debt-to-GDP ratio over time. This is the metric we should be focusing on in assessing the potential fiscal consequences of our actions. In this respect, it is important to note that the narrow impact of Fed remittances on the federal debt-to-GDP ratio depends on the cumulative amount, not the timing of remittances. Cumulative remittances to date have been hundreds of billions of dollars higher, all else equal, compared to if the Federal Reserve had not expanded its balance sheet.
Interest rates are quite low by historical standards, while the equity component of household net worth is improving, as shown in Figure 7. And we have seen some positive improvement in real disposable income. Given all that, one would normally anticipate that housing would be improving. However, lower interest rates are only helpful if credit is available. Figure 8 shows that the number of purchase loans to prime borrowers has been declining, while the subprime market  2  BIS central bankers’ speeches  is dormant.2 The left side of Figure 9 shows the distribution of all home-purchase loans by credit score in 2006 (before the financial crisis) and in 2010.3 It is striking how the distribution of purchase mortgages has changed. Credit standards have tightened, as evidenced by a shift to borrowers with higher credit scores. Given what has happened to housing prices, and unemployment, lenders are presumably more cautious in lending. Far fewer loans are going to borrowers with credit scores below 625, and many more purchase loans are going to borrowers with credit scores above 750. In 2006, about 15 percent of the purchase loans were to borrowers with credit scores below 625, but by 2010, this fraction had fallen to only 3.5 percent. The decline in loans to borrowers with sub-625 scores has not completely resulted from the decline in subprime lending. The right side of the figure shows the credit-score distributions among prime loans, and a similar rightward shift in the distribution is apparent.