Troubled by the persistently high cost of funding for the GSEs, the Federal Reserve Board said Tuesday it would begin purchasing the debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks next week.
For weeks, the GSEs have been forced to sell their debt at much higher prices than normal because investors seeking to avoid any risk have fled to bank debt, which is now guaranteed by the government. The higher debt costs have been passed on to consumers in the form of more expensive mortgage rates the exact opposite of what the government was hoping to accomplish when it placed Fannie and Freddie into conservatorship in September.
The Fed said it will purchase up to $100 billion of debt from primary dealers in auctions set to begin next week. The central bank also plans to purchase $500 billion in mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae. These purchases should get underway by yearend, according to the Fed.
The Fed also announced a program jointly developed with the Treasury Department that will lend up to $200 billion to holders of certain triple-A rated ABS backed by new and recently originated consumer and small business loans.
The program is intended to prop up the ABS market, which, according to the Fed, "came to a halt in October."
Under the program, the Fed will lend at market values and will take a haircut. The Treasury will provide $20 billion from the Troubled Asset Relief Program to help protect the central bank against credit losses.