OK, you write the headline

Britain's Telegraph:
Fed takes boldest action since the Depression to rescue US mortgage industry

Reuters:
Fed plan not a housing, mortgage market cure

So we all know stock market investors liked the Fed's latest brainstorm (or harebrained scheme?) to put the kabosh on the credit crunch. The Dow Jones industrials shot up more than 400 points -- the biggest gain in more than five years -- on news that the Fed will allow banks and investment firms put up mortgage-backed securities as collateral to borrow $200 billion in Treasurys.

But what does it mean for mortgage lenders and housing markets?

The plan is the Fed's "most creative, and best, idea yet," Wrightson ICAP economist Lou Crandall told clients, Marketwatch reports, because it's a way for the Fed to provide financing for mortgage-backed securities.

As noted here last week, the yield spread between Treasurys and mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac had grown wider than it's been in more than 20 years. That's a problem because it means higher interest rates for home buyers -- at a time when policymakers are hoping Fannie and Freddie can keep borrowing costs down.

The spread has grown in part because investors are worried that with the continued rise in delinquencies and foreclosures, these investments are riskier than they used to be -- even if they do carry the backing of Fannie and Freddie (who, we are told today, were "adequately capitalized" as of Dec. 31). But spreads have also grown because highly leveraged folks like the investment fund Carlyle Capital (or their creditors, actually) have been dumping MBS issued by Fannie and Freddie to cover margin calls. A glut of these securities on the market pushes their price down (and yields up).

Reuters (in the story referenced in the headline above) reports that news of the Fed's new plan helped reduce the spread between agency MBS and Treasurys by as much as 12 basis points. Prices of 30-year MBS were up slightly, while Treasury notes sank 1.25 points -- just what the doctor ordered.

The plan is working because now big banks and investment firms that need liquidity can go to the Fed, pledge their agency MBS as collateral, and borrow billions (in the form of more liquid Treasurys). The catch, skeptics say, is that the loans are only good for 28 days. Better than the overnight loans banks make to each other, but what would be really great, Crandall tells Marketwatch in another story, is if the Fed would make the loans for three months.

Another possibility that could be discussed when the Fed's Open Market Committee meets March 18: the Fed could just buy MBS outright.

"Bailout!" You scream.

Well hey, it might be better than a 75-basis point reduction in the federal funds rate, if you're tired of oil prices setting new records every day (and the inflationary pressures that come with higher energy costs) because of weakness in the dollar.

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