Fed set to buy mortgage-related assets

The Federal Reserve will buy up to US$800 billion in mortgage and asset-backed assets.

US Secretary of the Treasury, Henry Paulson delivers remarks today, as US authorities launched fresh efforts to unfreeze credit and limit the economic downturn.

The Federal Reserve announced today that it will buy up to US$800 billion (Dh2.94 trillion) in mortgage-backed assets in another step to ease financial worries. The Fed said it will purchase up to $100bn in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. It also will purchase another $500bn in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors. The $800bn effort on mortgages came as the Fed also unveiled a new program to help unfreeze the market that backs consumer debt such as credit cards, auto loans and student loans.

The program on consumer debt will lend up to $200bn to the holders of securities backed by various types of consumer loans. Treasury Secretary Henry Paulson had said recently that the government was working on the new program, which will be supported by $20bn of credit protection provided by the $700bn bailout fund. The Fed said that the $800bn effort to support the mortgage market was being taken to reduce the cost of home mortgages and increase their availability. It said the purchases of the mortgages and mortgage-backed securities would take place over a number of months.

The severe financial crisis that is rocking global markets at the moment began more than a year ago with rising defaults on subprime mortgages, loans provided to borrowers with weak credit histories. The billions of dollars of losses financial institutions have suffered on their mortgage loans have caused banks to stop making new loans of various types, which almost certainly has helped push the country into a deep recession. * AP