The Federal Housing Finance Board on Monday voted to let the banks use their existing capital to increase their holdings of agency mortgage-backed securities (MBS) for two years. The action was effective immediately.
"Increasing the agency MBS investment authority for the banks is another way in which the system can perform its traditional mission," said Ronald Rosenfeld, chairman of the Finance Board.
The Home Loan Banks were permitted to purchase about $150 billion of mortgage-backed securities under existing rules and will now be able to buy roughly that same amount in new agency investments, according to bank sources.
Fannie Mae and Freddie Mac investments are known on Wall Street as 'agencies.'
The 12 Federal Home Loan banks provide low-cost "advances" for real estate loans to member banks that hold their stock and have been one few sources of liquidity in a tightening credit market.
The regional banks are held cooperatively by more than 8,000 lending institutions and enjoy a favored position in the capital markets because of their implied government backing.
The U.S. Treasury Department issued a measured statement of support for the bank regulators' action, stressing that it saw it as a temporary action until markets settle down.
"The targeted decision by the Federal Housing Finance Board to enable the Federal Home Loan Banks to assist temporarily in this period of stress, consistent with safe and sound operations, will bring more liquidity to the mortgage market," Treasury Secretary Henry Paulson said.
The move helped U.S. Treasury debt extend sharp price losses, with investors betting that the Federal Reserve would be less likely to continue aggressively cutting interest rates because regulators have taken a stronger hand in spurring markets.
"It definitely is one of many bullets being fired at this (housing and mortgages) problem," and could weigh on Treasury prices, said T.J. Marta, fixed-income strategist with Royal Bank of Canada Capital Markets in New York.
"All these efforts are causing strategists to rethink the amount of easing they expect from the Fed," he said.