Fed Buys $10.2 Billion in Agency MBS

The Federal Reserve Bank of New York wasted no time after announcing Monday morning that it had begun buying mortgage-backed securities guaranteed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. By just Wednesday, the Fed had purchased a whopping $10.2 billion in illiquid mortgage-backed securities from the agencies, according to a statement released Thursday. The Fed has not, although, disclosed the particular financial institutions from which it purchased these assets. The purchases were part of a $500 billion program introduced late-November, in which the Fed said it would purchase up to $100 billion GSE direct obligations and $500 billion MBS backed by the agencies in an effort to replace waning demand from foreign and other more traditional buyers of mortgage bonds. The New York Fed program was launched after the Treasury Department shifted gears in its usage of bailout funds, opting  to buy large minority stakes in financial institutions. Lawmakers had initially expected the fund to be used to buy illiquid mortgage backed securities. In a late-December announcement, the Fed suggested its purchase program would run through the second quarter — a surprise to most analysts who had expected the program to last several quarters, though the end of 2009. “Obviously, this change in language indicates a lot stronger short-term support to the agency MBS market than originally assumed,” analysts at Bank of America said in a recent research note. Under the program, only fixed-rate agency MBS securities are eligible assets for the program, including 30-year, 20-year and 15-year securities. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents, a program information sheet said; the Fed will trade in specified pools, TBA transactions, and in the dollar roll market. The Fed said it would continue to provide weekly updates regarding purchases every Thursday. (Which means we’ll be covering purchase activity every Thursday/Friday.) Write to Kelly Curran at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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