Monday, January 5, 2009

Fed buys MBS in latest unconventional move

NEW YORK (Reuters) – The Federal Reserve on Monday kick-started its latest unconventional program to boost the moribund economy, this time taking aim at the heart of the slumping housing market.

The Fed plans to buy back as much as a ninth of outstanding bonds sold by housing finance companies Fannie Mae, Freddie Mac and Ginnie Mae and backed by U.S. mortgages, to drive down mortgage costs. The aim is to provide incentive for buyers to return to the housing market or cut monthly payments on existing home loans.

The New York Fed began buying mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie on Monday, part of a program of as much as $500 billion.

"They seem to be committed to getting interest rates on 30-year mortgages down to 4.50 percent, which is apparently a magnet for the market," said William O'Donnell, head of U.S. rates strategy at UBS in Stamford, Connecticut.

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