Fed damps hopes on mortgage-backed securities

By Aline van Duyn in New York
Published: June 4 2009 20:16 Last updated: June 4 2009 20:16

The US Federal Reserve on Thursday damped expectations that it was preparing to prop up the market for distressed bubble-era securities backed by mortgages.

Hopes that the Fed would in the coming months start providing financing to investors seeking to buy residential mortgage-backed securities (RMBS) – many of which have lost their triple A credit ratings – have pushed prices on these assets higher in recent months.

William Dudley, president of the Federal Reserve Bank of New York, said on Thursday that a decision had not been made. “We have not made a final decision on whether it is doable and, if it is doable, whether it is worth the cost,” he said.

Mr Dudley, who took over from Tim Geithner in January, has overseen the implementation of the $1,000bn term “asset-backed securities loan facility” (Talf), a key plank in the US government’s efforts to plug the hole left by the collapse of the asset-backed securities markets.

So far, the Talf has been used to finance the purchases of securities backed by loans to consumers, such as car and credit card loans. The Talf lends money to investors such as hedge funds on favorable terms, which encourages the purchases. This week, Talf financed 13 deals worth $16.4bn.

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