Interactive Graph - The Fed's $1.25 billion MBS purchase

Very Interesting Interactive Graph

The Fed's balance sheet showing what kind of debt it holds. Red represents US Treasury Securities. The chart shows how - starting in about March of 2009 and finishing in about March of 2010 - the government purchased more than $1 trillion (I believe the final number was $1.25 trillion) in Mortgage Backed Securities, MBS.

Click Here - WSJ Blog Article - and interactive graph

So the government bought up a bunch of toxic mortgages, to save the financial system - and they largely succeeded.

This does not mean that $1.25 trillion dollars will be flushed down the drain. Even if every one of the loans in the MBS portfolios goes bad, the foreclosure process allows the first mortgage holders to recover their investment. Banks (or now the Fed) that hold the first mortgages recover the money by either:
1) Selling the property through the foreclosure process at a county Trustee auction, or
2) Becoming the owner of the property themselves and selling them on real estate market.

In the first case, they get all their money. In the second case, they only get a fraction (maybe 50%, on average) since the 1st is worth less than the market value.

In many cases, there are junior loans on the property as well (2nd, 3rd trust deeds, etc). The junior loan holders usually get NOTHING in foreclosures or short sales. They may still hold the note against the borrower (who has now lost his or her home), but it is very difficult to collect from the borrower by any kind of legal judgment.