PDA

View Full Version : Fed aims to buy $500 billion in MBS by mid-year


Renegade
12-31-2008, 07:41 AM
Tue Dec 30, 2008 6:56pm EST

By Mark Felsenthal

WASHINGTON (Reuters) - The U.S. Federal Reserve on Tuesday moved forward aggressively with an effort to drive down mortgage costs, setting a goal of buying $500 billion in mortgage-backed securities by mid-2009.

The central bank said it would start buying the securities in early January under a program announced last month. When it announced the program, mortgage rates dropped in anticipation of the purchases.

Still, some analysts on Tuesday expressed surprise with how vigorously the Fed was pledging to act and the news propped up prices for MBS in very thin trade.

"When they are buying along the lines of $80 billion to $100 billion a month, if they're going to do it in six months, they have to buy everything they can get their hands on," said Kevin Cavin, a mortgage strategist at FTN Financial in Chicago.

"It will push up prices and tighten spreads and push down primary mortgage rates," he said.

The Fed selected investment managers BlackRock Inc (BLK.N), Goldman Sachs Asset Management (GS.N), PIMCO, and Wellington Management Co to implement the program.

The mortgage-buying program is part of a sustained government effort to help the United States withstand a severe credit crunch and deep housing downturn that have tipped the economy into recession and damaged activity around the globe.

Earlier this month, the Fed cut benchmark U.S. interest rates close to zero and signaled that it was turning more heavily to unconventional measures to spur the economy.

On Tuesday, it said it would increase the money supply to make the MBS purchases, effectively easing monetary policy further.

The program only covers securities issued by government-sponsored mortgage enterprises Fannie Mae and Freddie Mac and government loan financer Ginnie Mae.

When it announced the program on November 25, the Fed also said it would buy up to $100 billion in debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and after its meeting on interest rates on December 15-16 it said it could press even more heavily into mortgage markets.

"The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in the financial markets generally," the Fed said in a statement on Tuesday.

The central bank said it would adjust the pace of its purchases based on changing market conditions and the impact of the program. The initiative is aimed at reducing the cost of credit and increasing its availability, which authorities hope will support housing markets and foster improved financial conditions generally.

Investment managers are needed because of the size and complexity of the program, the Fed said.

Investor appetite for debt issued by Fannie Mae and Freddie Mac had dried up since the government seized control of both companies in September.

(Additional reporting by Lynn Adler in New York)

(Reporting by Mark Felsenthal; Editing by Diane Craft)
http://www.reuters.com/article/ousiv/idUSTRE4BT55Y20081230?sp=true