How $600 Billion Mortgage Plan Will Work

The Federal Reserve Tuesday promised to buy $600 billion in fresh debt and assets from Fannie Mae, Freddie Mac and other government-backed enterprises in order to oil the housing finance market.

In recent weeks, the cost of funds for the two mortgage-finance companies has increased, pushing up the costs of borrowing for home buyers.

The new policy is meant to "reduce the cost and increase the availability of credit" for home purchases and mortgage refinancing.

The purchases will work like this:

• Beginning next week, the Fed will buy up to $100 billion in debt from Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks in a competitive bidding process through the central bank's primary dealers.

• The Fed will contract asset managers to buy up to $500 billion in mortgage-backed securities issued by Fannie Mae , Freddie Mac and Ginnie Mae. The Fed hopes to begin those purchases before the end of the year. (While Fannie Mae and Freddie Mac were seized by policy-makers in September, Ginnie Mae has always been in government hands)
• The debt and asset purchases are expected to take place over several quarters.

• More details of the program will be released by the Fed as it writes the specific terms for the mortgage purchases.

Copyright 2008 Reuters. Click for restrictions.