GSE direct obligation program

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The GSE direct obligation program

Under the GSE direct obligation program, the Federal Reserve Bank of New York is purchasing debt from GSEs like Fannie Mae, Freddie Mac and Ginnie Mae. The GSEs raise funds by guaranteeing mortgage-backed securities or through selling debts like these, and in 2008 they were having difficulty doing so. This program keeps the GSEs funded and liquid – both through direct funding and by lowering the spread between the rates on U.S. Treasury debt and GSE direct obligations – which in turn keeps mortgage financing available.


Wall Street Bailout Accounting
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GSE DIRECT OBLIGATION PROGRAM
Balance Sheet
Disbursed*: $169.0B[1]
Current outstanding: $116.7B[2]
Public Funds
Maximum at-risk: $200B [3]
Current at-risk: $116.75B[4]

* See the methodology and glossary for definitions of "disbursed," etc.


Funding agency and aid type

The funding agency is the Federal Reserve Bank of New York.

Direct lending to GSEs like Fannie Mae, Freddie Mac and Ginnie Mae.

Who benefits

The GSEs and borrowers seeking mortgages involving the GSEs.

Background

Background: FRBNY:[5]

“What is the policy objective of the Federal Reserve's program to purchase direct obligations of the housing-related GSEs? The goal of these debt purchases, combined with the purchases of mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac and Ginnie Mae announced on November 25, 2008, is to reduce the cost and increase the availability of credit for the purchase of houses. Purchases of housing-related GSE direct obligations are intended to narrow the spreads between rates on GSE direct obligations and U.S. Treasury debt. On March 18, 2009, the FOMC reaffirmed this goal by expanding the GSE direct obligation purchase program by up to $100 billion, to a total of up to $200 billion. On September 23, 2009, the FOMC announced its intention to gradually slow the pace of these purchases and to execute them by the end of the first quarter of 2010 and on November 4, 2009 the Committee announced its intention for purchases to total about $175 billion… What type of GSE direct obligations will the Federal Reserve purchase under the program? The Federal Reserve purchases fixed-rate, non-callable, senior benchmark securities issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Prior to August 31, 2009, purchases were focused on off-the-run securities in that category. Going forward, purchases will include on-the-run securities in that category.”

SIGTARP:[6]

“Purchases of Direct Obligations of GSEs — Total Potential Support: $200 Billion. Government-Sponsored Enterprises (“GSEs”) are private corporations created by Congress to fulfill certain financial policy goals, primarily in the housing finance markets. The most prominent of these are Fannie Mae, Freddie Mac, and the FHLBs. As Fannie Mae and Freddie Mac in particular encountered difficulty raising funds in 2008, their problems affected the housing markets in general, where these two agencies alone accounted for more than half of all financing. To promote market functioning, the availability of credit, and support for the housing and mortgage markets, the Federal Reserve, on September 19, 2008, announced that it would commence purchasing debt and other instruments of the GSEs though its Open Market Trading Desk; these purchases are made in competitive auctions through primary dealers. On November 25, 2008, the Federal Reserve announced a program to purchase up to $100 billion in the GSEs’ direct obligations. Note that GSEs raise funds for mortgage lending in two ways — by direct borrowing or by guaranteeing third-party mortgage-backed securities (“MBS”). On March 18, 2009, the Federal Reserve’s FOMC increased the size of these lines to a total of $200 billion for direct obligations. Although the direct borrowing line has been focused on fixed-rate, non-callable, senior benchmark securities of the GSEs, the Federal Reserve has stated that it may change the scope of its purchases in the future.”

Prins’ analysis: “In March 2009, the Fed increased its purchases of debt from government-sponsored enterprises (Fannie Mae and Freddy Mac) from $100 billion to $200 billion.”[7]

Notes

The Fed has set the target for debt obligation purchases at $175B and plans to wind down the program at the end of the first quarter of 2010. Operations are not balance-neutral; they are funded through the creation of additional bank reserves.[8] The Fed has not sold any of the debt obligations as of Mar. 12, 2010.[9]

Articles and resources

Related SourceWatch articles

References

  1. Represents the peak of debt obligation holdings by the Fed on Mar. 10, 2010. See Federal Reserve Bank of St. Louis, “FEDDT, Federal agency debt securities: All Maturities,” available at http://www.research.stlouisfed.org/fred2/series/FEDDT?rid=20, accessed July 6, 2011.
  2. Federal Reserve Bank of St. Louis, “FEDDT, Federal agency debt securities: All Maturities,” available at http://www.research.stlouisfed.org/fred2/series/FEDDT?rid=20, accessed July 6, 2011
  3. Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), “Quarterly Report to Congress - July 2009” p. 146.
  4. Federal Reserve Bank of St. Louis, “FEDDT, Federal agency debt securities: All Maturities,” available at http://www.research.stlouisfed.org/fred2/series/FEDDT?rid=20, accessed July 7, 2011.
  5. Federal Reserve Bank of New York, “FAQs: Purchasing Direct Obligations of Housing-Related GSEs,” updated Feb. 23, 2010, available at http://www.newyorkfed.org/markets/gses_faq.html, accessed Mar. 12, 2010.
  6. SIGTARP July 2009 report, p. 146.
  7. Mother Jones analysis. Dec. 21, 2009. http://motherjones.com/politics/2009/12/behind-real-size-bailout
  8. Federal Reserve: http://www.newyorkfed.org/markets/gses_faq.html
  9. Search for “sale” of “agency” securities at Federal Reserve Bank of New York website, accessed Mar. 12, 2010.

External resources

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