Fed’s Plan ‘An Important Move’ for Real Estate, Mortgage Rates

Fed’s Plan ‘An Important Move’ for Real Estate, Mortgage Rates
Summary Reprinted Courtesy of RISMedia, Nov. 26, 2008

Following the Fed’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.

Charles McMillan, the 2009 president of the National Association of REALTORS®, (NAR) said, “This is one of the key actions we’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. Housing recovery is the key to economic recovery in this country and it always has been.”

In its recent announcement, the Fed said it will purchase up to $100 billion of government sponsored enterprise debt from primary dealers through a series of competitive auctions to begin in early December. It also will purchase up to $500 billion in mortgage-backed securities from Fannie Mae, Freddie Mac, and Ginnie Mae.

Lawrence Yun, NAR chief economist, said purchasing debt obligations of Fannie Mae and Freddie Mac is an important move. “We commend the Fed decision because it will directly bring down long-term interest rates,” he said. “The level of investment should be aggressive enough to bring rates down in a meaningful manner. As we’ve seen in past recessions, home sales rise when mortgage interest rates fall.”

Yun said that given the present state of the mortgage market, interest rates on 30-year fixed-rate mortgages are too high. “If Fed action brings down mortgage interest rates by even 1 percentage point, it would increase home sales by 500,000 units. That should help to draw inventory down and stabilize prices. Only with stabilization in home prices can we have a healthy housing and economic recovery.”


In addition, Treasury Department Secretary Henry Paulson said the department will provide $20 billion of credit protection to the Fed from the recent $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 said this new fund, which is aimed at freeing up credit, “will 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.”