Fed to Spend $600 Billion on GSE Obligations and MBSby Tim Manni
It has already been a busy morning for the Fed, and a happy one for Americans who have been wondering when their government would create a plan to prop up Main Street. We posted a story earlier that detailed the Fed’s implementation of the TALF, a facility designed to increase consumer lending through easier access to credit. Today the Federal Reserve has also announced plans to purchase $600 billion worth of obligations and mortgage-backed securities (MBS) from mortgage giants Fannie Mae and Freddie Mac.
“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,” said the Federal Reserve in this morning’s press release.
With the stroke of a pen the Fed has supported the marketplace by becoming a committed buyer for Fannie and Freddie’s debt. “Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late,” said the Fed. Since the GSEs were having significant trouble finding enough willing buyers for their debt offers, their cost of borrowing remained high, so mortgage rates have remained stubbornly high too. Coupled with a lack of buyers for MBS, rates had no place to go but up.
Despite the advantages for borrowers and homeowners, the Fed is taking on much longer-term debt than they have in the past — debt that surely won’t be free of default risk.
It has taken some time, but the government has stepped in to support a failing marketplace by investing a serious chunk of change. The move is likely to drive down mortgage rates, but will falling home prices continue to serve as a road block when it comes to consumers coming off the sidelines and deciding to invest in homes?