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  • Jason Tuvia

Federal Reserve Pledges Unlimited Buying of US-Backed Mortgage Securities

Initiative Expands Purchases of Loan Packages Issued by Federal Housing Agencies

The Federal Reserve has moved to provide as much buying powder as needed to keep mortgage securities markets fluid in the face of a mounting credit crisis from the effects of business shutdowns and other efforts to contain the coronavirus.

The central bank's Federal Open Market Committee said it will purchase Treasury securities and loan packages issued by federal housing finance agencies "in the amounts needed to support smooth market functioning." The committee announced last week it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities.

Last week's move included purchases of residential mortgage-backed securities. The action Monday added the purchases of agency commercial mortgage-backed securities backing multifamily properties across the country.

The moves comes after news over the weekend of pending mortgage bond selloffs and industry calls for further action.

"We are suffering massive cash flow and liquidity problems because we are shuttering our economy for the benefit of our nation’s health," Michael Bright, chief executive of the Structured Finance Association, wrote in an eight-page letter to Jerome Powell, chairman of the Federal Reserve, and Steven Mnuchin, secretary of the Treasury, urging them to take broader steps.

Chief among the letter's recommendations was expanding the purchase of securities and widening the eligible asset classes for purchasing.

"The uncertain magnitude and length of these financial burdens on U.S. consumers and businesses as a result of the national health emergency has placed a corresponding and considerable strain on those same American lenders and servicers as well as the fixed-income investors (many of which are pension plans, insurance companies and asset managers of 401(k) plans) who finance loans to consumers and businesses in the credit markets," Bright said in his letter.

He added that "as a result of this uncertainty, new issue and secondary credit markets have essentially stalled, with significant implications for the availability of affordable credit to small businesses and individuals."

Other Fed actions announced include:

  • Supporting the flow of credit to employers, consumers and businesses by establishing new programs that, taken together, provide up to $300 billion in new financing.

  • Establishing two facilities to support credit to large employers for new bond and loan issuance and to provide liquidity for outstanding corporate bonds.

  • Establishing a third facility, the Term Asset-Backed Securities Loan Facility, to support the flow of credit to consumers and businesses. The facility will enable the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and certain other assets.

  • Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility announced last week to include a wider range of securities, including municipal variable rate demand notes and bank certificates of deposit.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

Galina Alexeenko, managing director and senior economist at CoStar Group, said the moves on Monday broaden the Fed’s support for the economy to include consumers and more companies.

"In the past week or so, the Federal Reserve has pulled out all of its 2008-2009 tools and more, unleashing an unprecedented amount of liquidity and fulfilling its original role as a lender of last resort," she said.

The two unprecedented steps were the expansion of one of the Fed's crisis-era facilities to include purchases of commercial mortgage-backed securities and the creation of a Main Street Business Lending Program, she said.

"At some point the pandemic will end," Alexeenko said. "The Fed wants to make sure businesses are around to serve customers and can provide jobs so consumers have the means to resume spending after weeks or months of isolation."

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