The following article from RIS Media could potentially give people a lot to be thankful for this holiday season.
RISMEDIA, Nov. 26, 2008-(MCT/RISMedia)-Following the Fedâ€™s announcement of its plans to buy up to $600 billion in mortgage-backed assets, the housing industry welcomed this solution, citing Main Street and mortgage rates as the direct beneficiaries.â€ťThis is one of the key actions weâ€™ve been advocating ever since the Treasury altered its course on how it would use the $700 billion recovery package passed in September. This is great news for home buyers and sellers and we applaud the Fed for taking this historic step,â€ť said NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth. â€śHousing recovery is the key to economic recovery in this country and it always has been.â€ť
To support the mortgage markets and bring down mortgage rates, the nationâ€™s home builders also called on federal officials to clearly affirm that the government will provide long-term guarantees for the debt and securities purchased by Fannie Mae and Freddie Mac.
Investors are confused over the extent of federal support for long-term obligations held by the housing government sponsored enterprise (GSEs) and that uncertainty has pushed spreads on GSE debt in relation to Treasury yields to record highs, Jerry Howard, president and CEO of the National Association of Home Builders (NAHB), said in a letter to Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart.
â€śAs a result, mortgage rates are at unacceptably high levels, which is forestalling recovery of the housing market and creating a major drag on the economy,â€ť Howard added.
In yesterdayâ€™s announcement, the Fed said it would purchase mortgage-backed securities from Fannie Mae, Freddie Mac, and Ginnie Mae for up to $500 billion. â€śThis will be critical to a housing recovery,â€ť McMillan said.
Lawrence Yun, NAR chief economist, said purchasing debt obligations of Fannie and Freddie is an important move. â€śWe commend the Fed decision because it will directly bring down long-term interest rates,â€ť he said. â€śThe level of investment should be aggressive enough to bring interest rates down in a meaningful manner. As weâ€™ve seen in past recessions, home sales rise when mortgage interest rates fall.â€ť
Yun said that given the present state of the mortgage market, interest rates on 30-year fixed-rate mortgages are too high. â€śIf Fed action brings down mortgage interest rates by even 1 percentage point, it would increase homes sales by 500,000 units. That should help to draw inventory down and stabilize prices.â€ť
Yun said higher home sales are critical now to absorb inventory and stabilize prices. â€śOnly with stabilization in home prices can we have a healthy housing and economic recovery,â€ť he said.
In its announcement, the Fed said it will purchase up to $100 billion of GSE debt from primary dealers through a series of competitive auctions to begin next week. Purchases of up to $500 billion in MBS will be conducted by selected asset managers before year-end. Both the direct obligations and MBS purchases are expected to take place over several quarters.
It also will purchase another $500 billion in mortgage-backed securities, which consist of mortgage loans that are packaged together and sold to investors. These securities, viewed as toxic now because so many mortgages are going unpaid, are at the heart of whatâ€™s weighing down troubled banks. Purchasing them is intended to free up bank lending, which would spur the economy.
In addition, Paulson said Treasury will provide $20 billion of credit protection to the Fed from last monthâ€™s $700 billion financial rescue package. The protection will be part of a new Fed program that could lend as much as $200 billion to investors in securities backed by credit card, auto and other loans.
Paulson noted that â€ścredit market stresses led to a steep decline in the third quarter of 2008, and the market essentially came to a halt in October.â€ť
Compounding the problem, he said, was that â€ścredit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending (and) as a result weakens our economy.â€ť
The new fund aimed at freeing up credit, Paulson said, â€świll enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer financing and small business loans.â€ť