The Federal Reserve Wednesday afternoon revealed that it will start purchasing agency MBS once again as a way to help support the mortgage market.
This move is expected to keep residential loan rates low for the next 12 months and support a refinancing initiative the Obama administration is trying to launch.
At its two-day meeting, the Federal Open Market Committee (FOMC) decided to stop the runoff of its $885 billion portfolio of Fannie Mae, Freddie Mac and Ginnie Mae issued MBS.
The committee issued instructions to its money managers to start reinvesting the principal payments into new agency MBS.
The FOMC also said it will purchase $400 billion in longer term U.S. Treasury securities and sell shorter turn notes to put "downward pressure on longer-term interest rates and help make broader financial conditions more accommodative."
By itself, the $400 billion commitment to purchase longer-term Treasury would not guarantee that mortgage rates would remain low. Rumors of a White House-backed, broad-based refinancing effort for GSE loans has widened the spread between Treasury securities and agency MBS.
In a recent research report, Keefe, Bruyette & Woods (KBW) equity analyst Mark Pawlak noted that Fed officials appear frustrated that so many Americans are blocked from refinancing and reaping the economic benefits of the record low mortgages. "(W)e believe that the Fed has given its stamp of approval to such a program and would probably support it with monetary policy if implemented," according to an early September KBW research paper.
The Fed has plenty of experience purchasing agency MBS. In December 2008 the central bank set a target of purchasing $1.25 trillion of agency MBS, which it completed at the end of March 2010.