Wednesday, December 31, 2008

Fed to buy $500 billion MBS by mid-year?

The U.S. Federal Reserve on Tuesday moved forward aggressively with an effort to drive down mortgage costs, setting a goal of buying $500 billion in mortgage-backed securities by mid-2009.

The central bank said it would start buying the securities in early January under a program announced last month. When it announced the program, mortgage rates dropped in anticipation of the purchases.

http://www.reuters.com/article/businessNews/idUSTRE4BT55Y20081230?feedType=RSS&feedName=businessNews

The Fed will be doing the buying through PIMCO, Goldman Scahs, BlackRock and Wellington Management.

The Federal Reserve Act says:

To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.
http://federalreserve.gov/aboutthefed/section14.htm

The FBNY says it will purchase the following:

What securities are eligible for purchase under the program?

Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program. The program includes, but is not limited to, 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents. Eligible assets may be purchased or sold in specified pools, in “to be announced” (TBA) transactions, and in the dollar roll market.
http://www.newyorkfed.org/markets/mbs_faq.html

Ginnie Mae securities are guaranteed by the Government. Freddie and Fannie, are not.

Look to Freddie Mac's website under question 6):

Is Freddie Mac a government agency?

No. Freddie Mac was chartered by Congress as a private company serving a public purpose.
http://www.freddiemac.com/corporate/company_profile/faqs/#BM6_

When did the "implicit" guarantee become "explicit" for Fannie and Freddie?

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