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Fed Begins Fixed-Rate MBS Purchases

NEW YORK CITY-GSE spreads are rising, which will limit the beneficial impact of this move.

By Erika Morphy and Paul Bubny | Updated on January 05, 2009

[IMGCAP(1)]NEW YORK CITY-The Federal Reserve Bank is kicking off the New Year with its previously announced plan to buy fixed-rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve will release more details about these operations–such as the amount of the securities it is purchasing–on Thursday, Jan. 8, it said in a statement. “Selected private investment managers are acting as agents of the New York Fed in these purchases,” it said.

BlackRock Inc., Goldman Sachs Asset Management, PIMCO and Wellington Management Co. have been tabbed to manage the $500-billion purchase of MBS that the New York Fed plans to complete by the end of Q2. The Fed says it is necessary to work through external investment managers because “the operational and financial characteristics of MBS purchases are significantly more complicated than those associated with the assets that have traditionally been purchased by the Federal Reserve.”

This move, first announced at the end of November is part of a multi-front war the federal government is waging against the credit meltdown and now, recession. The Federal Reserve Bank announced it would buy $100 billion of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. In subsequent statements it said that it would focus on stable securities with maturities of 30, 20 and 15 years–excluding riskier securities such as securities based on interest-only loans.

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