Two large Federal lending programs are still being ramped up. In one, the central bank will buy up to $600 billion of debt issued or guaranteed by Fannie Mae, Freddie Mac and other government-backed mortgage businesses. So far, the Fed has only committed $8 billion to purchasing bad credit home loans. Officials have been relieved that mortgage rates have come down since announcing the program.  

According to HSH Associate, mortgage rates for conforming thirty year home loans dropped from 6.64% to 5.28% since the Fed’s last meeting, a financial publishing firm. It has been one of the few areas in financial markets where credit costs have shown substantial improvement in the past few weeks.  “Over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant,” the Fed said.

Fed officials have high expectations for a separate program through which they will lend up to $200 billion against high-rated securities backed by car loans, student loans, credit-card debt and small-business loans.  U.S. officials have said the program, which is called the Term Asset-Backed Securities Loan Facility and is expected to be operational in February, can be expanded to other asset classes — such as commercial real estate loans or mortgages not backed by Fannie Mae and Freddie Mac.  FHA loans also got a boost from the Fed’s rate reduction, as FHA mortgage executive, Jeff Moran said, “FHA mortgage applications have surged since last week.”  Moran continued, “Our lending office alone saw a 35% increase new loan application volumes, compared to the previous week.” 

The latest housing data underscored the grim economic setting. The housing downturn is now more than three years old. “November’s report for new home production and permit issuance indicates not only that conditions aren’t improving in the housing market, but that the situation is getting worse,” said David Crowe, chief economist with the National Association of Home Builders.  Real estate news in 2008 has been mostly negative amid the foreclosure crisis and stock market slide.  Kelly Media Group President, Jason Cardiff spoke to reporters in Toronto today as the rate cut news hit the wires.  Cardiff said, “The Federal Reserve has made their move to lower mortgage rates to these historic levels.  Now struggling American homeowner who have been waiting on the sidelines to refinance can now jump into the game.”  Cardiff continued, “Let’s take a moment for have a round of applause…Fixed rates at 5% is good news for American homeowners.”

The Federal Open Market Committee had downgraded its unemployment and economic growth projections at its last meeting on October 29th and things have only gotten worse since then. The unemployment rate, at 6.7% in November, was already above the Fed’s October forecast for the fourth quarter and looks sure to go higher still. 

Economists at Macroeconomic Advisers LLC, a forecasting firm, say the nation’s gross domestic product is on track to contract by 6.5% in the current quarter. If they’re right, it will be the worst quarter since 1980.  “Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined. Financial markets remain quite strained and credit conditions tight,” the Fed said. 

The recent decline in mortgage rates could help revive housing markets. Federal Reserve officials also are focused on reducing other interest rates relative to Treasury benchmarks, a difference that is known on Wall Street as a ’spread.’ Across a wide-range of consumer lending, spreads have remained painfully high since September, a sign of tight credit conditions.