Efforts by federal regulators to promote liquidity in the asset- and specifically mortgage-backed securities market has overall helped mortgage borrowers, according to a second-quarter report by the Financial Stability Oversight Board on the Treasury Department‘s implementation of the Troubled Asset Relief Program (TARP) and other programs within the Emergency Economic Stabilization Act of 2008. In particular, the purchase of agency MBS by the Federal Reserve beginning this year coincided with a drop-off in average interest rates on 30-year fixed-rate mortgages. In the second quarter, the Fed and Treasury held down the rise of these interest rates to only 60 bps, despite larger increases in yields on reference Treasury securities, according to the report (which can be downloaded here). The narrowing of the spread between Treasury yields and Freddie Mac (FRE) current coupon 30-year MBS yields that resulted has more closely aligned the spread with historic levels, the board’s report says. “The Oversight Board also believes that actions taken by Treasury under the TARP and under other authorities, together with those taken by the Federal Reserve, continued to aid the housing market and mortgage borrowers during the period by further relieving strains in the functioning of credit markets and aggressively supporting the demand for mortgage-backed securities,” the report reads, in part. During the second quarter, higher borrowing costs “reduced the attractiveness” of refinancings but had little effect on overall demand for purchase mortgages, the board notes. The financial system continued to experience significant strains during the second quarter, despite the $203bn in capital injections provided by the Treasury so far. The injections, made to 649 financial institutions across 48 states, reflect the reach of the TARP’s Capital Purchase Program as of June 30. The Oversight Board noted the Treasury extended more than $23.9bn of loans under Term Asset-Backed Securities Loan Facility, which has supported the issuance of approximately $32.9bn of asset-backed securities. It also also noted efforts to support the restructuring of domestic auto companies and to monitor executive compensation among TARP fund recipient corporations. Write to Diana Golobay.

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