WASHINGTON -- The Federal Home Loan Bank system won permission yesterday to double the amount of capital that it can spend to purchase mortgage bonds in an effort to boost home lending and revive the nation's housing market.
The Federal Housing Finance Board approved a plan that would allow the 12 privately financed, government-sponsored Federal Home Loan Banks that the system regulates to purchase about $100 billion in mortgage bonds over the next two years.
The home loan banks will snap up more newly issued mortgage bonds, or securities, which are packaged by the government-sponsored enterprises Fannie Mae and Freddie Mac.
The effort supports the sagging housing market by ensuring that there is enough cash in the system, so that lenders are willing to lend and borrowers to borrow.
"The targeted decision by the Federal Housing Finance Board to enable the Federal Home Loan Banks to assist temporarily in a period of stress ... will bring more liquidity to the mortgage market," said Treasury Secretary Henry M. Paulson Jr.
As the national housing crisis worsened last year, the Federal Home Loan Bank system stepped up its lending to member banks, savings and loan associations and credit unions. It lent $800 billion last year.
Banks no longer hold most home loans on their books but instead sell them into a secondary mortgage market, where they are bundled with other home loans and sold as bonds to investors. The process is called securitization, and much of it is done by Fannie Mae and Freddie Mac.
When the nation's housing market began skidding in late 2006, investors' appetite for mortgage bonds dried up. Banks, credit unions and thrifts have been stuck with loans or have been unwilling to underwrite new mortgages because home loans cannot be securitized easily.
"The lack of investment in mortgage-backed securities has exacerbated the credit crunch for families looking to buy homes, as well as for existing borrowers looking to refinance into more affordable loans," said Kieran Quinn, president of the Mortgage Bankers Association.