In an attempt to increase the availability of credit for homebuying and to reduce borrowing costs, the Federal Reserve has begun buying troubled mortgage-backed securities as part of an initiative the central bank originally announced in November (“Fed Starts Program of Purchases of Mortgage Securities,” AFP, Jan. 5, 2008).

The Fed’s new purchasing program will be overseen by The Federal Reserve Bank of New York, which will work with four investment managers — BlackRock Inc., Goldman Sachs Asset Management, PIMCO, and Wellington Management Co. — to purchase more than $500 billion in mortgage-backed securities from government–sponsored mortgage holders Fannie Mae and Freddie Mac.

This initiative to purchase securities came after the U.S. Treasury decided against its original plan to use its authority under the $700 billion bailout plan, the Troubled Asset Relief Program, to buy high-risk, subprime mortgage securities from the nation’s ailing banks. Treasury officials decided, instead, to use the money to invest directly in national banks whose books have been burdened by hundreds of billions of dollars in losses and write-downs.

The central bank says it plans to release further information about its new mortgage-securities purchases later this week. The Fed, of its own accord, had already bought nearly $100 billion dollars of mortgage-backed securities prior to the creation of the program.

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