Prices on agency mortgage bonds rose and risk premiums tightened sharply Tuesday as buyers return in full force to extend last week's gains.

The demand will be welcome news to the Federal Reserve as it confirms the Fed's expectation that private buyers would replace the central bank's $1.25trn purchase program that ended March 31.

A combination of pent-up demand, cash on hand and expectations for a stable range of movement in 10-year Treasury yields are providing a boost to these securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Buyers include banks, domestic money managers and foreign banks.

GMAC Financial Services denied on Wednesday a New York Post report that said it was struggling to sell its troubled mortgage unit Residential Capital, which could lead to another bailout.

"The New York Post's story on ResCap is absolute nonsense," spokeswoman Gina Proia said. "At the end of last year, we announced we would evaluate strategic alternatives for ResCap. This week we announced meaningful progress with an agreement to sell the European mortgage operations and assets."

A Post spokeswoman said, "We stand by our reporting."

Barbara Desoer, president of Bank of America Home Loans, testified on Capitol Hill Tuesday about the housing crisis and the steps BofA is taking to modify troubled mortgages. And she painted a bleak picture, according to her prepared testimony.

Some numbers from her remarks:

• 1.4 million borrowers, or 10 percent of the entire BofA residential mortgage portfolio, are more than 60 days delinquent.
• More than 16,000 BofA employees are dedicated to helping troubled borrowers work out a solution.
• BofA has taken $10.4 billion in write-downs tied to mortgages over the past two years.

New flood insurance policies aren’t currently available because Congress failed to reauthorize the National Flood Insurance Program — generally the only source of the insurance for consumers — before it went on recess last month.

While Congress is expected to pass some kind of extension soon, those looking to buy homes in areas at high risk of flood may still be wondering whether they’ll be able to get a mortgage in the meantime if flood insurance is a requirement.

This month, Fannie Mae, which provides financing to the mortgage market by buying the loans from lenders, sent this letter to lenders it works with. In the letter, Fannie Mae said, “to help ensure the continued availability of mortgage financing to borrowers seeking to purchase properties located in Special Flood Hazard Areas,” it would buy loans secured by properties in those areas, even if there was no active flood insurance policy as long as certain conditions were met.

Consumer prices rose 0.1% in March, a little less than expected. Most of the month's rise in prices came from a spike in the prices of fresh fruits and vegetables, so your typical American family didn't suffer inflation at all.

While the overall CPI rose 0.1%, the core CPI was unchanged in March. Core CPI measures consumer prices except for food and energy. Medical care and new and used vehicles got more expensive, and houses, furniture and clothing got less expensive.

The flat core CPI bodes well for mortgage rates, which have declined this week as investors gobble up mortgages to replace the home loans that the Fed bought in its $1.25trn spending spree.

In a move likely to help 100,000 struggling homeowners, the California Legislature recently passed a law that allows Californians to exclude mortgage forgiveness from their income or tax purposes.

“California has been particularly hard hit by the housing crisis,” said state controller and Franchise Tax Board chairman John Chiang, in a prepared release. “This is a critical tax change that will help people in our state who already are suffering the loss of their homes.”

The law allows taxpayers to exclude canceled mortgage debt on their principal residence of up to $500,000.