UPDATE 1-Fed buys $1.631 bln of Fannie, Freddie, FHLB debt

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NEW YORK, Dec 23 (Reuters) - The Federal Reserve bought $1.631 billion of debt of Fannie Mae (FNM.P: Quote, Profile, Research), Freddie Mac (FRE.P: Quote, Profile, Research) and Federal Home Loan Banks on Tuesday in an ongoing effort to lower mortgage rates.

Dealers submitted $4.415 billion for consideration in the Fed purchase of "federal agency" debt in maturities ranging from December 2012 to November 2017. The purchase is the fifth since the Fed began such operations on Dec. 5, bringing total buys to $15.031 billion.

Fannie Mae and Freddie Mac, the largest providers of funds for U.S. home mortgages, use proceeds from unsecured agency debt to buy home loans and mortgage-backed securities for their $1.6 trillion combined investment portfolios. The Fed buying has helped yield spread premiums on agency debt drop to three-month lows since the program was announced in late November.

Freddie Mac 10-year debt spreads widened after the auction to 0.77 percentage point more than similar Treasury debt, from 0.74 point earlier and 0.76 point on Monday. The spread has narrowed from a high of 1.72 points on Nov. 20, according to TradeWeb and Reuters data.

Greater demand for mortgage assets allows lenders to offer lower rates to consumers. The Fed also plans to directly buy up to $500 billion in agency MBS.

A drop in demand for agency debt in October as investors began to question government support of the securities boosted Fannie Mae, Freddie Mac and FHLB borrowing costs to record highs, disrupting their abilities to stabilize the ailing U.S. housing market. Foreign central banks are still offloading agency debt and MBS holdings, and through last week have cut their balances at the Fed by about $150 billion since July.

The Federal Home Loan Bank system uses agency debt to make low-cost loans to commercial banks and savings and loans, which have been rising as the credit crunch freezes other sources of mortgage money.

For more details on the operation please click on: here (Reporting by Al Yoon; Editing by Leslie Adler)