Politics & Government

Feds to buy more mortgage bonds in move to boost market

WASHINGTON — The Federal Home Loan Bank system won permission Monday to double the amount of capital that it can spend to purchase mortgage bonds in an effort to boost home lending and revive the nation's housing market.

The Federal Housing Finance Board approved a plan that would allow the 12 privately funded, government-sponsored Federal Home Loan Banks that the system regulates to purchase about $100 billion in mortgage bonds over the next two years.

The Home Loan Banks, created after the Great Depression to boost mortgage lending and community investment, will snap up more newly issued mortgage bonds, or securities, which are packaged by the government-sponsored enterprises Fannie Mae and Freddie Mac.

The effort supports the sagging housing market by ensuring that there's enough cash in the system so that lenders are willing to lend and borrowers are able to borrow.

"The targeted decision by the Federal Housing Finance Board to enable the Federal Home Loan Banks to assist temporarily in a period of stress . . . will bring more liquidity to the mortgage market," Treasury Secretary Henry Paulson said in a statement.

As the national housing crisis worsened last year, the Federal Home Loan Bank system stepped up its lending to member banks, savings and loan associations and credit unions. It lent $800 billion last year.

Banks no longer hold most home loans on their books but sell them into a secondary mortgage market instead, where they're bundled with other home loans and sold as bonds to investors. This process is called securitization, and much of it is done by Fannie Mae and Freddie Mac.

When the nation's housing market began skidding in late 2006, investors' appetite for mortgage bonds dried up. Banks, credit unions and thrifts have been stuck with loans or have been unwilling to underwrite much new mortgage lending because home loans can't be securitized easily when there aren't willing investors.

"The lack of investment in mortgage-backed securities has exacerbated the credit crunch for families looking to buy homes, as well as for existing borrowers looking to refinance into more affordable loans," Kieran Quinn, the president of the Mortgage Bankers Association, said in a statement welcoming Monday's action.

Federal Home Loan Banks have accepted these home loans as collateral for short-term loans ranging from months to two years or longer.

The mortgage bonds remain on the balance sheets of the institutions that offer them as collateral. But these banks, credit unions or thrifts are still able to borrow to obtain cash for new lending while they wait for the housing crisis to pass and investors' interest to return.

"The home loan bank gives them an outlet of sorts," explained Stephen M. Cross, the director of the Federal Housing Finance Board's office of supervision.

This can be seen as an indirect bailout to lenders or as a lifeline that helps keep a vital market afloat.

The advances to lenders by the 12 Federal Home Loan Banks will affect only mortgage bonds issued since Jan. 1.

To address pre-existing problem loans and mortgage bonds, Congress raised the loan limit last month for mortgages issued by the Federal Housing Administration, so-called FHA loans. That move came in tandem with raising the limit on the value of loans that Fannie Mae and Freddie Mac can purchase, and bundle with other home loans into mortgage bonds. In both cases, the limits were almost doubled to $729,750 in selected, high-cost markets.

Last week, federal regulators lowered the amount of cash on hand required at Freddie and Fannie, freeing another $200 billion for the purchases of home loans to be bundled into mortgage bonds.