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Federal Reserve of NY Begins Buying Fannie, Freddie Mortgage-backed Securities

Posted on 05 Jan 2009

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As part of a $500 billion program to support the U.S. housing market, the Federal Reserve Bank of New York started buying mortgage-backed securities today. 
The New York Fed “began purchasing fixed-rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae,” the Fed bank said in a statement released by e- mail. “Selected private investment managers are acting as agents of the New York Fed in these purchases.” 
The central bank didn’t disclose the amount of the purchases, saying such details will be available on the New York Fed’s website beginning Thursday, Jan. 8, and will be updated each Thursday. 
The Fed chose BlackRock Inc., Goldman Sachs Asset Management, Pacific Investment Management Co. and Wellington Management Co. to manage the $500 billion purchase of mortgage- backed securities it plans to complete by June. 
The collapse of U.S. mortgage finance last year led to the worst credit crisis in seven decades and triggered writedowns and losses at financial institutions exceeding $1 trillion. 
The central bank has expanded credit by $1.3 trillion over the past year through programs extending liquidity to banks, bond dealers and other financial institutions. The Fed plans to create money to purchase the bonds, boosting bank reserves. 
The Fed previously said the purchases will include securities with maturities of 30, 20 and 15 years, and will exclude riskier securities such as interest-only bonds. 
The Fed’s program is intended to lower rates by reducing the supply of outstanding agency mortgage bonds, boosting their prices and thus lowering their yields. Lower yields in turn reduce the interest rates banks need to charge on new mortgages to ensure profitable sales of the securities.