The Federal Reserve will purchase $600 Billion in Mortgage-Related Assets

In another attempt to help the financial crisis, the Federal Reserve (The Fed) announced that it will purchase $100 Billion in direct obligations from Fannie Mae and Freddie Mac and also purchase $500 Billion in mortgage-backed securities (MBS) from the mortgage giants.

By purchasing these mortgage assets the Fed is attempting to lower interest rates and increase the availability of mortgage lending throughout the country. By purchasing these assets, the Fed will increase liquidity in the markets. By increasing the liquidity it will drive the price of these assets higher and lower their yield (rate).

After the Fed’s announcement, interest rates immediately decreased. And, mortgage applications have skyrocketed in the couple days since the announcement. So far, most of the increase in mortgage applications is due to refinancing but the hope is that mortgages for home purchases will increase as well which should stabilize and increase home values.

The Fed also announced similar plans aimed at unfreezing consumer credit markets such as those for credit cards, auto loans, and student loans.

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