Fed Moves Forward with MBS Purchases
Dec 31st, 2008 @ 6:34 PM by Amber Nelson
On Tuesday, the Federal Reserve named four investment companies it has appointed to start buying up billions of dollars worth of mortgage-backed securities (MBS) during the coming months, in an effort to stabilize the national economy and mortgage market.
The enlisted companies are BlackRock Inc, Goldman Sachs Asset Management, PIMCO, and Wellington Management Co. These parties will assist the Fed in purchasing between $80 and $100 billion of mortgage-backed securities every month in order to meet the goal of $500 billion of MBS by the middle of 2009.
The Fed had announced plans in November to buy up MBS starting in early January in order to provide more liquidity in the ailing lending markets.
Tuesday’s statement made the Fed’s intentions clear. “Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae,” the statement said. “The program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.”
After the original announcement, mortgage interest rates dropped dramatically and have continued falling. The Fed hopes that by injecting more cash into banks, rates will stay low and encourage both lenders and mortgage borrowers to be more financially active.
In order to pay for these MBS purchases the Fed has said it will increase the money supply, or in other words, print more currency and hope that inflation remains in check.
This aggressive MBS strategy comes just weeks after the Fed reduced its target interest rate to a range of zero to 0.25 percent, effectively eliminating its power to influence the economy with rates alone. The Federal Reserve promised at that time to use all available tools to stimulate the economy and stabilize the mortgage markets.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.