Feds unveil new plans to unfreeze credit

by Frank James

The Federal Reserve and Treasury Department unveiled their latest plans to loosen up the mortgage and consumer credit markets.

The Fed is basically going to buy up to $600 billion in bonds and mortgage-backed securities of the government-sponsored enterprises like Fannie Mae and Freddie Mac, which are actually now government owned and operated since they were taken over in September.

That is meant to drive up the prices of the bonds and mortgage-backed securities and drive down their interest rates, which should make it easier for Fannie, Freddie and the rest to raise money at lower costs. That money in turn could used to make more mortgage loans. Here's the Fed's release which says the same thing, just in Fedspeak.

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters. Further information regarding the operational details of this program will be provided after consultation with market participants.

The Fed also announced a new program meant to free up consumer credit. The Fed calls it the Term Asset-Backed Securities Loan Facility or TALF, not to be confused with the TARP.

The Fed will essentially lend up to $200 billion to financial institutions holding securities backed by assets like auto, credit cards and school loans, the thought being that it will free up banks to increase their consumer lending.

Here's the Fed's release on that new program, again in the Fed's form of English which we'll call Fedlish. Note that it is being run by the New York Fed whose president is Timothy Geithner, President-elect Barack Obama's choice to be Treasury Secretary.

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

For those who want more details, here are the terms and conditions.