New York Fed Launches Effort to Cut Mortgage Costs

The New York Federal Reserve started an effort to drive down mortgage costs on Monday by buying fixed-rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, the bank said.

AP

Mortgage rates dropped in anticipation of the purchases after the program was announced on November 25, and on Monday, risk premiums on mortgages tightened sharply on news purchases had begun.

Last week, the Federal Reserve set a goal of buying $500 billion in mortgage-backed securities by mid-2009 as part of a sustained effort to help the United States weather a financial crisis that has tipped the economy into recession.

More information about the operations will be available from Thursday, Jan. 8 and will be updated weekly, the New York Fed said.

Risk premiums "are screaming in tighter already, especially in lower coupons," which generally represent newer loans, said Kevin Cavin, a mortgage strategist at FTN Financial in Chicago.

Current coupon 30-year agency MBS yielded 190 basis points over a blend of five- and 10-year Treasuries early Monday, compared with 208 basis points on Friday and 200 basis points at year-end on Wednesday.

The Fed selected managers BlackRock, Goldman Sachs Asset Management, PIMCO, and Wellington Managementto implement the program, which only covers securities issued by government-sponsored mortgage enterprises Fannie Mae and Freddie Mac and government loan financer Ginnie Mae.

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