The Federal Reserve announced plans to purchase $750 billion more in mortgage-backed securities this year than previously expected, bringing the total price tag up to $1.25 trillion in an effort to drive down mortgage rates and stimulate the economy.
The plan is a component of the overall expansion of the Fed’s balance sheet, which is geared toward stimulating the economy by encouraging borrowing after effectively reducing short-term interest rates to zero, but further means are deemed necessary for increased growth.
Besides increasing mortgage-backed securities purchases, over the next six months the government intends to purchase up to $300 billion in long-term Treasury securities and has increased their promise to purchase $200 billion from the original $100 billion in debt issued by Fannie Mae and Freddie Mac.
Analysts anticipate a drop in rates to as much as a half of a percent and this is expected to produce a huge drop in mortgage rates.
The plan should provide prospective homebuyers and individuals who seek to refinance, the reassurance that mortgage rates will remain low for several months.
Up to now, the Fed has utilized $217 billion of the $600 billion program introduced last September to steer mortgage rates downward.
The initiative has accreditation for its effects on lowering interest rates on conventional mortgages to significant lows of around 5 percent.
The government urges the need for further reductions in rates and also plans to purchase more than half of the home loans made nationwide in 2009 based on the $1.4 trillion in mortgages in 2008.
Fannie and Freddie are the nation’s largest sources of mortgage funding, owning or guaranteeing a combined $5.2 trillion of a home-loan market reaching $12 trillion
The move will likely help those who have the means for the required down payments on home purchases, or the required equity needed in order to successfully refinance, but will come up short for the almost 14 million homeowners whose principal balance exceeds the current market value of their homes or are on the brink of foreclosure.
The Obama administration, on March 4, announced an initiative program known as “Making Home Affordable” with a budget of $75 billion in federally funded bailout money in order to help rescue those troubled homeowners.