US officials on Tuesday opened a new front to fight the financial crisis with two new programmes aimed at boosting lending to consumers and small businesses and supporting the market for mortgage-backed securities.
The US Treasury said that it would allocate $20bn to back a new lending facility for the consumer asset-backed securities market, an important source of liquidity for institutions that provide small business, auto and student loans and which has essentially shut down during the credit crunch.
The Term Asset-Backed Securities Loan Facility will be operated by the Federal Reserve, which will extend up to $200bn in non-recourse loans to holders of ABS backed by loans that have been newly or recently originated.
The $20bn contribution from the Treasury will come from its $700bn Troubled Asset Relief Program.
In addition, the Fed said it would buy up to $100bn of debt from mortgage financiers Fannie Mae and Freddie Mac and the Federal Home Loan Banks through a series of competitive auctions starting next week. It will also buy up to $500bn mortgage-backed securities backed by those entities, hopefully by the end of the year.
"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said in a statement.
The latest initiatives, in which the Fed is committing another $800bn, underscore the extent to which policymakers are turning to unconventional methods to thaw lending activity. They also signal yet another twist to the $700bn Tarp programme which passed after a tumultuous battle in Congress.
The Treasury said the new TABSL facility was intended to assist the credit needs of consumers and small businesses – by facilitating the issuance of ABS and improving ABS market conditions – but added that the facility "may be expanded over time and eligible asset classes may be expanded later to include other assets," including commercial mortgage-backed securities, non-agency residential mortgage-backed securities or other asset classes.
Less than two weeks ago, the US Treasury had dropped its plan to buy toxic assets, which has been the centrepiece of the original plan, much to the dismay of the markets.
Under the new facility, the Federal Reserve Bank of New York will lend up to $200bn on a non-recourse basis to holders of newly issued AAA-rated ABS for a term of at least one year.