A week after restrictions were eased on Fannie Mae and Freddie Mac to allow them to gobble up at least $200 billon in mortgage-backed securities, the federal home loan banks have been freed to follow suit.
The FHLBs—12 cooperative banks established during the Great Depression to support mortgage lending—said today that the Federal Housing Finance Board had approved their purchasing roughly $150 billion of additional mortgage-backed debt.
We asked Chris Low, the chief economist at FTN Financial, for his thoughts on the development:
How significant is the home l oan banks' move?
Well, it certainly is helpful. The big problem with mortgages right now—the reason that it costs you and me more when we go to borrow from a bank—is that the secondary market has sort of frozen up. There is an awful lot of supply [of mortgage-backed securities]. So what we've done is we've put another buyer out there.
In terms of scale, the mortgage market is around $11 trillion. It's not huge but [the home loan banks' action] does make a difference. Especially in that with all three of these—Fannie, Freddie, and now home loan—the expansion that they are making is in higher-quality mortgages. No one is going to be eager to lend subprime anyway, and Alt A [mortgages are] pretty much done for now as well. So by limiting the focus to the highest-quality mortgages, at least we can get that part of the market functioning again.
Will the FHLB's action lead to lower mortgage rates?
I think it probably will help to some extent. You're not going to see mortgage rates return to their normal relationship with treasury yields, I think, until confidence is restored—especially among foreign buyers, and that was the big loss. Domestic buyers—insurance companies, banks—they are still lining up to buy it. In fact, they are pretty happy about the level of yield. But we sold an awful lot of mortgage paper in Asia and in Europe, and particularly the European buyers are on strike.