The Federal Reserve announced today that it will launch a program to buy up to $600 billion in mortgage-backed securities and GSE direct obligations to help buoy the flagging mortgage market.
Under the plan, the Feds will purchase up to $100 billion in direct obligations of housing-related debt from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
Additionally, up to another $500 billion in mortgage-backed securities backed by Fannie, Freddie, and Ginnie Mae will be purchased, conducted by assets managers selected by the Fed.
“Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late,” the Fed said in a statement. “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.”
Both the purchases of direct obligations and MBS are expected to take place over the next several quarters, ideally beginning before year end.
The Federal Reserve Board also announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a credit facility aimed at supporting household and small business debt.
Under TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion to holders of certain AAA-rated ABS backed consumer loans (auto, student, credit card) and small business loans.
“The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.”
As a result, the RSBNY will receive $20 billion in credit protection via the Troubled Asset Relief Program (TARP).
Both plans are geared towards unfreezing credit markets and increasing credit availability to consumers.