The measures announced by the US Treasury to support Fannie Mae / Freddie Mac and the US mortgage-backed securities market are comprehensive and should lower the cost and increase the availability of mortgage finance.

Two aspects of the plans are particularly significant. First, Fannie and Freddie will expand their portfolios of retained mortgages and mortgage-backed securities until the end of 2009 before embarking on a controlled reduction. This contrasts with the UK authorities' policy following the rescue of Northern Rock of reducing the bank’s mortgage book by £20 billion a year in 2008 and 2009. As argued previously, this has unnecessarily aggravated mortgage and housing market weakness.

Secondly, the Treasury will buy mortgage-backed securities issued by Fannie and Freddie in the open market, with no predetermined limit on the scale of purchases. Again, there is a contrast with UK policy: the Bank of England's special liquidity scheme allows mortgage-backed debt to be swapped for Treasury bills but has had little positive impact on the prices of such securities because credit risk remains with the banks.

As the chart shows, the woes of Fannie and Freddie have been reflected in a rise in the spread between conventional mortgage rates and interbank swap rates in recent months. A lowering of their funding costs should allow mortgage rates to fall significantly.