Fed's Mortgage Plan Lowers Its Sights
The Federal Reserve is having trouble tying up the loose ends of its $1.25 trillion program to buy mortgage-backed securities, prompting an announcement Monday that it would buy different bonds than planned.</br></br>The Fed said it hasn't been able to complete the last $9.2 billion worth of deals to buy 5.5% 30-year bonds issued by Fannie Mae and Freddie Mac because the debt is in such short supply. Instead, the Fed said it would buy other securities with lower nominal interest rates.</br></br>The 5.5% notes are now so scarce that would-be sellers -- financial institutions called primary dealers -- are struggling to find enough of them to hand over to the Fed. Many are failing to deliver them.</br></br>The Fed's dilemma shows just how tight the mortgage market has become -- fewer mortgages are being made, resulting in fewer mortgage-backed bonds being created. Tighter supply, however, has helped drive up prices by 3% to 4% on the 5.5 coupons securities; under the purchase agreements those gains belong to taxpayers.</br></br>While the Fed ended its 15-month program to buy mortgage-backed securities at the end of March, several deals were designed to close this summer. Some of the buying was made in the forward market, so the agreement was set before the program ended, but the securities didn't have to be delivered until later.