Mortgage Foreclosure & Refinance Resource

In his latest attempt Federal Reserve Chairman Ben S. Bernanke’s to repair the mortgage meltdown that poses the biggest threat to the economy, the Fed pledged yesterday to lend, in return for mortgage debt, $200 billion of Treasuries to the securities firms that trade directly with the central bank. Officials told reporters later that the program may escalate from there as the central bank seeks to break the logjam in the home-loan market.

The step goes beyond past initiatives because the Fed can now inject liquidity without flooding the banking system with cash. Bernanke and his colleagues are trying to halt a cycle in which the losses on mortgage investments cause banks to cut their lending, sending the economy into a deeper contraction.

“It is a strong attempt to stabilize a crisis,” Henry Kaufman, president of Henry Kaufman & Co. in New York and the former chief economist at Salomon Brothers Inc., said in a Bloomberg Radio interview. “It is a further recognition that this credit crisis is deeper and wider, and has been exceedingly opaque, in contrast to earlier credit crises.”

Investors’ unwillingness to hold mortgage-backed bonds amid record home foreclosures sent premiums on even Fannie Mae and Freddie Mac guaranteed assets to the highest in 22 years this month. The two government-chartered companies are the biggest sources of U.S. housing finance.

The Fed decided to act when the crisis spread beyond the securities backed by subprime loans, officials said on condition of anonymity. Policy makers gathered by conference call the evening of March 10 and voted to set up the new lending tool, spokeswoman Michelle Smith said in Washington.

“They see residential mortgage securities markets as the linchpin,” said Stephen Stanley, chief economist at RBS Greenwich Capital Markets Inc., who used to work at the Richmond Fed bank. “If they can get that normalized, it might resolve some of the other problems.”

Economists at Goldman Sachs Group Inc. and Nomura International Plc questioned how successful the new initiative would prove in easing the credit squeeze. It doesn’t improve the solvency of some institutions or encourage looser lending standards.