Fed plan not a housing, mortgage market cure

By Lynn Adler - Analysis

NEW YORK (Reuters) - A central bank plan to infuse the financial system with new cash is a temporary fix for the debilitated U.S. mortgage bond and housing markets, but not a cure.

The program announced by the Federal Reserve on Tuesday frees up money for mortgage loans and dealer bond buying in the two markets paralyzed by limited funding and fears of bank failures, economists and analysts say.

"This is a tourniquet, it will staunch the bleeding, but it may not turn us around and bring the patient to health," said Susan Wachter, real estate and finance professor at The Wharton School, University of Pennsylvania.

Tighter lending standards, dried up funding and record foreclosures are swelling the supply of unsold homes in the worst U.S. housing market since the Great Depression.

"This is designed to stop in its tracks what might otherwise be an old fashioned credit crunch where the banks simply themselves seize up," Wachter said. "It's not a sure fire end of the crisis by any means."

The Fed will let dealers use U.S. agency debentures and agency mortgage bonds, as well as top-rated private label mortgage securities as collateral in the new lending facility.

This will be the first time the Fed takes non-agency residential mortgage bonds as auction collateral in its latest effort to add market liquidity. It already accepts this kind of paper as collateral from banks that borrow directly from the U.S. central bank at the discount window.

The initial $200 billion funding for the plan might be raised, according to the Fed. The size of the plan pales in comparison with the mortgage bond markets totaling more than $7 trillion.