Fed Auctions Billions in Securities

WASHINGTON (AP) — Big investment houses took the Federal Reserve up on its first-time offer Thursday to let them borrow Treasury securities, the latest effort to ease a painful credit crisis.
The Federal Reserve auctioned $75 billion worth of Treasury securities. Bidders paid an interest rate of 0.330 percent. Demand was high. The Fed received bids of $86.1 billion worth of the securities.
It was the first time the Fed conducted an auction of this kind. The next one will be held April 3.
The program, dubbed the Term Securities Lending Facility, was announced earlier this month by the Fed and is intended as a booster shot for financial institutions and for the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday.
Big Wall Street investment firms could borrow much-in-demand Treasury securities from the Fed and put up more risky investments, including certain shunned mortgage-backed securities as collateral for the 28-day loans.
The new program is designed to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities have driven up mortgage rates, aggravating the housing crisis. Since the Fed's announcement of this new program, rates on some mortgages have eased somewhat.
Federal Reserve Governor Randall Kroszner, in a speech Thursday, said curbing shady lending practices that contributed to the housing and credit debacles should help revive the badly shaken confidence of the public and investors.
"Effective consumer protection can help to restore confidence in the mortgage markets and help to preserve the flow of capital to consumers who wish to purchase a home," Kroszner said.
Under fire from Congress for being too lax in its oversight, the Fed has proposed a sweeping rule to protect homeowners from dubious lending practices. Subprime borrowers — those with tarnished credit histories or low incomes — have been hurt the most, although problems have spread to more credit-worthy borrowers.
The Fed has a proposal that would: restrict lenders from penalizing risky borrowers who pay loans off early; require lenders to make sure these borrowers set aside money to pay for taxes and insurance; and bar lenders from making loans without proof of a borrower's income.
It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value. The proposal would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.