Signs of success in Fed's Fannie, Freddie programs
NEW YORK (Reuters) - With a third of the Federal Reserve's $100 billion program to buy Fannie Mae, Freddie Mac and the Federal Home Loan Banks' debt and more than a quarter of its $500 billion agency mortgage backed securities buys now completed, there are some signs of success.
Mortgage rates have fallen, boosting applications not only to refinance home loans and lower monthly payments, but even for new home buyers.
Freddie Mac's average 30-year loan rate was 5.04 percent in the past week, down a full percentage point from 6.04 percent since November.
"They've been successful at driving down primary mortgage rates. That's the objective of the Fed's MBS purchase program, to make housing finance more affordable," said Kevin Caron, a mortgage strategist at FTN Financial in Chicago.
Thursday's purchases bring the total agency debt the Fed has bought so far to $32.89 billion. On the agency side, the Fed in the past week bought $19.9 billion in agency mortgage-backed securities, MBS, bringing the total bought so far to about $135 billion.
"That takes pressure off of home owners from an economic standpoint because they get to lower their monthly mortgage payments for those who can qualify. That's a big caveat," Caron said. "Theoretically this should also make housing more attractive."
Both programs squarely target the housing market, at the heart of the economy's problems.
Perhaps the best way to gauge the programs' success so far is the decline in risk premiums, which have fallen dramatically in both the agency debt and agency mortgage-backed securities' markets since the purchase programs were announced in November. That said, they are still above pre-crisis levels.
In the 2010 maturity, agency debt risk premiums over Treasuries have been slashed by 110 basis points since November 24, the day before the program was announced, according to RBS Greenwich data. In the longer maturities, like the 2013 to 2017 notes targeted in Thursday's purchase, spreads are 70 to 85 basis points narrower. Much of that improvement happened immediately after the announcement.
Spreads have generally held at the tighter level, but the Fed's purchases have hit some roadblocks.
In the mortgage-backed securities market, for example, risk premiums on 4.5 percent MBS where the Fed has concentrated purchases have been unable to drop below a 1.36 to 1.70 percentage point-range since January 13, after falling from 2.26 percentage points in December.
Traders said liquidity has somewhat improved since November in both markets, though the Federal Reserve remains a major bidder.
Freddie Mac's record sale of $10 billion three-year notes on Wednesday was "a pretty good indication of demand at a concession price" from investors aside from the Fed in the agency debt market, said Margaret Kerins, agency strategist at RBS Greenwich Capital in Chicago.
But, she added, the Fed's repeated indication that the program could be enlarged if needed was also helping support the market.
Given the amount of purchases still on the cards though and the unpredictability of the current crisis, traders said it was too early to say if the programs would need to be extended.
(Additional reporting by Al Yoon; Editing by Leslie Adler)
