WASHINGTON – The Federal Reserve Board yesterday unveiled a plan to begin purchasing the debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks – a move driven in part by the high cost of funding for the government-sponsored enterprises.
For the past several 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 higher mortgage rates, which is counter to what the federal government was seeking to accomplish when it placed Fannie and Freddie into conservatorship in September.
The Fed said it plans to 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 year end, 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 asset-backed securities 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.
Credit union analysts were absorbing how the latest iteration of the rescue plan would impact the movement. “Chairman Fryzel has been in continual contact with Treasury as part of his consultative role with TARP,” NCUA Spokesman John McKechnie told CU Journal “As evidenced by his recent correspondence with Secretary Paulson as well as with Congress, the Chairman is advocating appropriate measures be adopted for both credit unions and their members.”
CUNA CEO Dan Mica also weighed in on the program, saying: “The Fed’s announced plan to buy up to $500 billion in mortgage-backed securities could be welcome news to some credit unions that are seeking an invigorated market for these assets now on their books. We urge the Fed to include credit unions in this program as soon as possible. Further, the program should also be helpful to credit unions and their members overall, as it can serve to make mortgages more affordable to borrowers through lower interest rates.”
Said NAFCU Public Relations Manager Patty Briotta: “We commend the Treasury Department’s actions this morning in fulfilling its congressional mandate to purchase mortgage-backed securities. Credit unions did not cause this crisis and we continue to hope that credit unions will not have to access any support programs, but we are pleased to see the Treasury Dept. pursue an approach that would assist all depository institutions-not just banks.”
