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Did the Fed’s Mortgage Support Program Work?

It was one year ago today that the Federal Reserve announced their plan to “reduce the cost and increase the availability of credit for the purchase of houses” On November 25, 2008 the Fed decided to support Main Street and the mortgage market by committing their first round of purchases to Fannie and Freddie mortgage-backed securities (MBS).

While it was only a year ago, it has been interesting to look back at the Fed’s announcement as well as our blog posts and see if the Fed’s original goals were met and if the program succeeded as intended.

Federal Reserve Press Release, dated 11/25/08 (emphasis added):

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.  Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.  This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

How did this program fare — did it do its job? The answer is “yes” and “no.” While mortgage costs were significantly reduced, and remained subdued, the availability of credit has remained constricted.

From the latest issue of HSH’s Market Trends Newsletter, “Mortgage Rates Downshift, Match Year’s Low” (emphasis added):

A year ago [today], the Federal Reserve weighed into mortgage markets, initiating a (since expanded) program to purchase Conforming and FHA mortgage-backed securities. In the ensuing weeks, 30-year conforming mortgage rates dropped by almost a full percentage point, and have largely remained at low levels ever since (a late-Spring flare higher excepted). As we close in on the anniversary of the program, it could be argued that there has been no support program more meaningful for homebuyers and refinancers since the housing crisis began.

On September 23 of this year, the Fed announced plans to extend their MBS purchase program until March 31, 2010. By September, it was apparent that housing conditions hadn’t improved to the point where the Fed could exit the market without consequence. Even today, housing’s problems are far from resolved. Seriously underwater borrowers who haven’t been able to refinance and who don’t want to walk away from their properties have a difficult road ahead of them.

While it’s a shame that extraordinarily tight credit conditions have prevented this program from helping more borrowers than it has, as we wrote in the latest Market Trends, “The blasts of refinancing which have run though the market this year have helped families recast their balance sheets, and are probably more responsible for increases in consumer spending than any other government program, subsidy, tax credit or support.”