The government's $1.25-trillion program to prop up the housing market by purchasing mortgages came to an end Wednesday -- in a small, messy room at the Federal Reserve Bank of New York with four desks and a Nerf basketball hoop.
For the last year, a small team of traders has worked here to buy massive amounts of mortgages to fill the void left after institutional investors quickly retreated in the throes of the 2008 financial crisis, unable or unwilling to put money into the fast-melting mortgage arena.
The purchases have given the Federal Reserve its largest balance sheet ever and triggered fears of runaway inflation. But most analysts now credit them for lowering mortgage rates, providing a vital lifeline for the battered housing market.
"Something like this had never been tried on this scale before," said Mark Gertler, a former resident scholar at the New York Fed and an economics professor at New York University. "The fact that they got it mostly right is quite remarkable."
Now, with home prices stabilizing and an economic recovery beginning to take hold, the hope is that private investors will fill the gap left by the Fed, ensuring that money will continue to be available to underwrite home loans. Turning mortgages into salable bonds provides lenders with fresh cash that can be used to make new loans.
The team at the New York Fed has been tapering off its purchases in the last few months as other financial institutions began to step in and pick up some of the slack. Mortgage rates have not moved dramatically, and industry experts estimate that they are unlikely to do so in the near future.
"The average guy looking for a mortgage is not going to see much difference," said Scott Simon, a managing director at bond giant Pacific Investment Management Co. in Newport Beach.
Before the Fed program began, Pimco and other investment firms such as BlackRock Inc. were major buyers of so-called mortgage-backed securities, which are bonds backed by bundles of home loans.
Pimco and other bond investors will step back into the market, Simon said, but they'll demand slightly better investment earnings than the Fed settled for. That in turn will push up interest rates for borrowers -- but only a little, perhaps an eighth of a percentage point, he said.
The program's end removes one of many supports the government has been providing to the housing market. Others include the federal takeovers of mortgage financing giants Freddie Mac and Fannie Mae and incentives for banks and loan investors to modify mortgages, thus lowering borrowers' payments and curtailing foreclosures.
The team of traders at the New York Fed began buying up mortgage-backed securities about a year ago. Setting up shop on the ninth floor of the New York Fed's imposing stone headquarters near Wall Street, the team eventually grew to about 30 people.
Initially the team directed groups of traders at other investment houses including Pimco and Goldman Sachs who purchased the securities on behalf of the government.
The back-office staff then helped move the bonds to JPMorgan Chase & Co., which serves as a holding bank for the Fed. Early this year, the actual trading shifted to four Fed employees working out of a small office cluttered with old newspapers, empty water bottles and Broadway playbills.
Each day, the traders put out requests to some of the 18 big banks that work with the Federal Reserve, stating what types of mortgage bonds they were looking to buy, and in what price range. As responses came in, the traders determined which prices were good enough -- if any -- and then executed the trades on TradeWeb, a computer network used by other banks.
Andrew Huszar, a 37-year-old trader who has run the mortgage purchasing program, was recruited to the team from a private investment bank, where his compensation was significantly greater.
"I felt like, 'Wow, this is a chance to really help at a pretty unique time in history,' " he said.
Huszar and his colleagues were not merely chasing profits, like most trading floors. They were also chasing stability in the financial system. The timing and size of each purchase were carefully calibrated so as not to upset the markets or to put the trading team at a disadvantage.
"We had the ability to move the markets with our purchases, so we had to be very careful," Huszar said, standing outside the trading room.
The end of the program still leaves many uncertainties. The purchases have made the Federal Reserve the world's largest single holder of mortgages, a problem for the federal balance sheet if many of those mortgages go sour. It also has ballooned the Federal Reserve's balance sheet to $2.3 trillion, up from $700 billion before the crisis.
"We face an extraordinary challenge with this exit," Brian Sack of the New York Fed's markets group said recently. "This challenge, which involves operating in uncharted territory along several dimensions, will inherently involve some uncertainties and risk."
That is unprecedented, and it could make it hard for the Federal Reserve to do its main job of managing interest rates. Sack has spoken about a number of tools for dealing with the unusual situation, including paying interest to banks that park cash at the Fed.
Sack and Federal Reserve Chairman Ben S. Bernanke have also spoken about the possibility of selling some of the mortgages that they have just bought, a job that would, in all likelihood, fall back to the team on the ninth floor in New York.
For now, the team is looking for things to slow down, however briefly.
As the last of the $1.25 trillion in mortgages were purchased Wednesday, a crude countdown sign at "Team Room 1" said, "Only 1 MBS Buying Days Left." Just outside the room, Huszar had a smile on his face.
"We're going to have a little party for ourselves at the end of the day," Huszar said. "This has been an incredible year in the history of the Fed."
Times staff writer E. Scott Reckard contributed to this report.