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Fed, Treasury Announce Plan to Jumpstart Lending

The Federal Reserve and Treasury Department on Tuesday unveiled hundreds of billions more in money they are pumping into the struggling U.S. economy, trying to jumpstart lending by the nation's banks for mortgages and consumer debt.

Together, the programs from the Federal Reserve and the New York Fed aim to dump $800 billion in additional funds into the struggling U.S. economy, more than Congress approved in October for a bailout of the nation's banks and Wall Street firms.

The NATIONAL ASSOCIATION OF REALTORS® said the actions will free up money on Main Street and lower long-term interest rates, which in turn will boost home sales.

"This is great news for home buyers and sellers and we applaud the Fed for taking this historic step,” said NAR President Charles McMillan. “Housing recovery is the key to economic recovery in this country and it always has been.”

Under the plan, the Federal Reserve announced it will purchase up to $500 billion in mortgage-backed securities that have been backed by Fannie Mae, Freddie Mac, and closely held Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote homeownership. It will also buy another $100 billion in direct debt issued by those firms.

"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," said the statement from the Fed.

By putting money in the hands of holders of consumer and mortgage loan securities, the government hopes more money will flow to consumers than has occurred so far in previous bailout plans.

The moves came as the Commerce Department announced that gross domestic product, the broad measure of the nation's economy, fell at an annual rate of 0.5% in the third quarter, the biggest drop in economic activity in seven years. Economists believe that the economy is likely to continue to contract in the current quarter and into early next year.

Source: Chris Isidore, CNNMoney.com (11/25/08), NAR