Morgage Bond Purchases Start Strong

By PRABHA NATARAJAN and BRIAN BLACKSTONE The Federal Reserve bought $10.213 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae in the first three days of a new program to support the housing market. The central bank has pledged to buy $500 billion, or possibly more, of these bonds backed by home loans in the first half of the year, an effort that has started to drive down mortgage rates. Market participants had expected the Fed purchases to average $3 billion to $4 billion daily, which would keep it on target to complete the aggressive spending spree within the first half. There was little reaction Thursday in the mortgage-bond market to the data. But risk premiums on these bonds have narrowed as much one percentage point from their highs in November before the Fed announced its purchasing program. As a result, mortgage rates that homeowners pay also have fallen, from above 6% levels in November to 5.01% Thursday, according to Freddie Mac. The program is the latest of many new efforts launched by the Fed in recent months to bolster markets. In the process, its balance sheet has ballooned in size. The Fed's balance sheet stood at $2.14 trillion Wednesday, down from nearly $2.3 trillion the previous week, according to the latest data released Thursday. That doesn't include the latest purchases of mortgage bonds. The balance sheet could eventually climb toward $3 trillion once the Fed's new programs are fully implemented. The balance sheet was under $900 billion at the end of 2007 and was still less than $1 trillion as recently as mid-September. Meanwhile, (Depository institutions) deposits (also known as reserves) held at the Fed by banks slid last week by about $14 billion to $846.1 billion, according to Fed's weekly report. Borrowing through the Fed's discount window by commercial banks, known as primary credit, fell about $10 billion from last week and stood at $83.68 billion Wednesday. Lending through the Fed's primary-dealer credit facility, created in March for investment banks following the collapse of Bear Stearns, fell to $34.33 billion on Wednesday from $37.4 billion the previous week. Once one of the more secondary of Fed reports, weekly balance-sheet data have taken on heightened importance as Fed policy enters a new phase where credit programs replace the federal-funds rate as the central bank's main tool. Last month, the Fed slashed the fed-funds target to a record-low range near zero. In a statement, officials signaled their focus will be on the Fed's balance sheet to stimulate the economy. There was little change in net portfolio holdings in connection with the Fed's commercial-paper funding program, which stood at $334.1 billion on Wednesday. Purchases under the program started Oct. 27, allowing companies to sell their three-month commercial paper to the Fed. The U.S. commercial-paper market rose sharply last week, by $83.1 billion. With Fed purchases largely steady, that suggests private-sector activity may be returning to that sector. Foreign central banks and other official institutions held $2.523 trillion in Treasury and federal agency debt at the New York Fed as of Wednesday, roughly unchanged from a week before. —Meena Thiruvengadam contributed to this article. FHLB Capital May Fall Under Required Levels The Federal Home Loan Banks may see their capital fall below regulatory minimums as they face possible write-downs on their portfolios of $76.2 billion of mortgage bonds, Moody's Investors Service said in a report. The bonds, known as private-label MBS, aren't guaranteed by housing-finance giants Fannie Mae and Freddie Mac. Moody's said that in a worst-case scenario, capital at just four of the 12 home-loan banks would remain above regulatory minimums, but the ratings agency said that was unlikely. The 12 regional home-loan banks, chartered by Congress in 1932 to prop up thrift institutions during the Depression, are cooperatives owned by more than 8,000 commercial banks, thrifts, credit unions and insurers. They make loans to the institutions that own them, with collateral frequently consisting of home mortgages or related securities. Because investors usually assume the U.S. government would rescue the home-loan banks in a crisis, they have long been able to borrow at favorable terms in global bond markets. Moody's said the home-loan banks' role has become increasingly important since the onset of the financial crisis, because they have been "a vital source of reliable liquidity" to their members and the U.S. banking system. Their total private-label MBS portfolio was valued at $62.7 billion in the third quarter based on market prices, representing a $13.6 billion unrealized loss. If those unrealized losses are deemed "other-than-temporary impairments," as U.S. accounting rules may require, "the FHL banks' capital levels would be significantly affected -- an issue that is likely to become far more evident during the next two quarters," said Moody's senior vice president Brian Harris, author of the report. —Kerry E. Grace