The Federal Reserve today announced two new financial programs that are designed to thaw the nation’s lending freeze and make it easier for consumers to obtain loans for homes, as well as cars, credit cards, and other consumer debt. This new consumer “lifeline” includes the purchase of mortgage-related debt and securities, as well as the establishment of a new federal lending facility. The Fed’s commitment for both initiatives totals $800 billion.
As part of a new mortgage program, the Federal Reserve said it would purchase up to $100 billion in direct obligations issued by the government-sponsored enterprises (GSEs) – Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks. In addition, the Fed plans to buy $500 billion in mortgage-backed securities (MBS) guaranteed by Fannie, Freddie, and Ginnie Mae.
According to a statement issued by the Federal Reserve, 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,” the Fed stated.

The purchases of GSE debt obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions that will begin next week. Purchases of MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end, the Fed said. The purchases of both are expected to take place over several quarters.
James B. Lockhart, director of the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), called the move by the Federal Reserve to purchase secondary mortgage market instruments “a very positive step.” Lockhart said, “This $600 billion program should be a major boost to the mortgage and housing markets. By providing more liquidity to the market, FHFA expects these actions to help reduce the large interest rate spreads between mortgages and Treasuries, resulting in lower mortgage rates over time, assisting homeowners and home purchasers.”
The second initiative launched by the Federal Reserve involves the establishment of the Term Asset-Backed Securities Loan Facility (TALF) and is specifically aimed at helping consumers and small businesses meet their credit needs. Through this new facility, the Federal Reserve Bank of New York will lend as much as $200 billion to holders of AAA-rated, asset-backed securities (ABS) that are backed by newly and recently originated small-business loans, credit card loans, student loans, and auto loans.