May 30, 2009

Bank profits could take a hit as the federal government's trillions of dollars in borrowing to combat the economic crisis have began to take their toll on mortgage rates.Rates, which are linked to federal benchmarks, had been ticking downward since late last summer. The trend was first driven by investors' flight to safety in Treasury bonds as the financial crisis heated up, then helped by the placement of Freddie Mac (FRE Quote) and Fannie Mae (FNM Quote) into conservatorship last September.

The government has used the two mortgage-finance giants to foster a housing market recovery with lower rates, but it still wasn't enough. After months of speculation about such a move, the Federal Reserve slashed its interest-rate target to a range between 0% and 0.25% in mid-March.The central bank also said it would step directly into the market to buy $1.25 trillion worth of mortgage-backed securities, $200 billion worth of debt from Fannie and Freddie and up to $300 billion in long-term Treasury securities over the following six months.