Federal Home Loan Banks add to rescue

The Federal Home loan Banks have been allowed by the Federal Housing Finance Board to purchase more mortgage securities and increase their asset base given their current bank capital. They should now be able to purchase up to $150 billion through an increase in their limits to purchase assets up to six times their capital base from three times. This increase FHLB leverage will allow for new marginal mortgage buyers in the secondary market on a temporary basis. This does not add money to the financial system but allows for credit expansion to offset the deleveraging by traditional banks. The increase in their capital buying ability is for a two year period.

The current action adds to policy changes in Fed lending and the buying ability of Fannie Mae and Freddie Mac. This should lead to tightening of mortgage spreads and may change expectation in the mortgage market. We should see more interest is selling Treasuries and buying mortgages. If mortgage credit becomes more reliable, mortgage transaction will start to increase and there may be some clearing of the market. This will not solve the crisis but it a good alternative to cutting the Fed funds rate. This type of action will be dollar positive because it reduces the chance that the Fed will have to follow a policy of continual cuts.