Federal Reserve launches two new programmes to support fledgling lending market
United States’ (US) officials yesterday opened a new front to fight the financial crisis with two new programmes aimed at boosting lending to consumers and small businesses and supporting the market for mortgage-backed securities.
The US Treasury said that it would allocate US$ 20 billon to back a new lending facility for the consumer asset-backed securities market, an important source of liquidity for institutions that provide small business, auto and student loans and which have essentially shut down during the credit crunch.
The Term Asset-Backed Securities Loan Facility will be operated by the Federal Reserve, which will extend up to US$ 200 billion in non-recourse loans to holders of ABS backed by loans that had been newly or recently originated.
The US$ 20 billion contribution from the Treasury would come from its US$ 700 billion Troubled Asset Relief Program.
In addition, the Federal Reserve said it would buy up to US$ 100 billion of debt from mortgage financiers Fannie Mae and Freddie Mac and the Federal Home Loan Banks through a series of competitive auctions starting next week.
It would also buy up to US$ 500 billion mortgage-backed securities backed by those entities, hopefully by the end of the year.
“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Federal Reserve, the US central bank, said in a statement.
Speaking at a press conference after the moves were announced, Treasury Secretary Hank Paulson called for patience as authorities moved to deal with the current crisis.
“It is naive for any of us to think that when you’re dealing with a situation of this magnitude that a bill could be passed or a single action taken to make all the issues go away. Our focus is on stability and strengthening the financial system and we now have the tools and powers we need to work with others,’ Paulson said.