The Federal Reserve is teaming up with the Department of the Treasury to purchase up to $800 billion in troubled assets through purchases of mortgage- and asset-backed securities as part of an effort to pump more liquidity into the financial markets.
The Federal Reserve will purchase $600 billion of mortgage-backed securities and an additional $200 billion of asset-backed securities to help provide consumers with credit.
Under the plan, announced this morning, it will purchase up to $100 billion in debt from Fannie Mae of Washington and Freddie Mac of McLean, Va., and the Federal Home Loan Banks.
The Federal Reserve will also purchase up to $500 million in mortgage-backed securities from Fannie, Freddie and Ginnie Mae of Washington.
"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets," the Federal Reserve said in a statement.
It also launched another new initiative, the Term Asset-Backed Securities Loan Facility, which will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated asset-backed securities by "newly and recently originated" loans, including student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration, according to the Fed.
In this program, the Treasury Department will provide $20 billion of "credit protection" to the Federal Reserve, which will come from the latter's $700 billion Troubled Assets Relief Program.
The new facility is designed to "increase credit availability and support economic activity by facilitating renewed issuance of consumer and small-business [asset-backed securities] at more-normal interest rate spreads," the Fed said.
"By providing liquidity to issuers of consumer asset-backed paper, the Federal Reserve facility will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower-cost consumer finance and small-business loans," Treasury Secretary Henry Paulson Jr. said in prepared remarks delivered in Washington this morning.
He added that the facility may be expanded over time, and eligible asset classes may be expanded later to include other assets, which include commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.
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