NY Fed Begins Buying Mortgage Securities

NEW YORK -- The Federal Reserve Bank of New York said Monday it has begun purchasing mortgage-backed securities in an effort to bolster the battered housing market.

The program, initially announced Nov. 25, allows the Fed to spend $500 billion to buy mortgage-backed securities guaranteed by mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) and another $100 billion to directly purchase mortgages held by Fannie, Freddie and the Federal Home Loan Banks. The program is aimed at driving down the price of mortgages and making home loans more available.

The mortgage-backed securities being purchased are considered investment grade and are not the packages of loans that helped ignite the current credit market turmoil. An initial sharp rise in defaults in 2007 among subprime mortgages -- loans given to customers with poor credit history -- helped touch off the ongoing credit market downturn. As defaults continued to rise, the value of securities backed by subprime mortgages plummeted and investors shied away from purchasing the risky debt.

Mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac are typically higher-quality prime mortgages and not pools of subprime loans, meaning they carry less risk.

In October, the government said it would purchase those riskier subprime securities from banks in an effort to rid the sector of the assets that have led to hundreds of billions of dollars in losses and write-downs. But, the administration altered its plan and decided instead to use its $700 billion program to invest directly in banks.

The Fed said in a statement it expects to provide weekly details of the purchasing program beginning Thursday.

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