Ending months of speculation, the Federal Reserve announced this morning that it would spend up to $600 billion to buy mortgage-related assets in an attempt to prop up the battered housing market.

Specifically, the Fed said that it would buy as much as $100 billion in direct obligations from the housing-related government-sponsored enterprises—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, it will buy $500 billion in mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Though the move was a positive sign that the federal government wants to help the housing market, analysts questioned whether financial institutions would use the funds to invest in the residential mortgage market, especially given the likelihood of further declines in home prices and rising foreclosures. The Fed hopes to at least improve liquidity and reduce mortgage interest spreads.

“Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late,” the Fed said in making the announcement. “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

Mortgage interest rates began falling after the announcement. By mid-afternoon, rates on 30-year fixed-rate mortgages were below 6 percent, according to Bankrate.com.

The $600 billion would be equal to about 5% of total mortgage debt, 8% of securitized mortgage debt, and 13% of agency-backed mortgage debt, according to an analysis by Zelman & Associates.

The Fed will begin a series of competitive auctions through its dealers next week to buy the direct obligations. It hopes to begin buying mortgage-backed securities before the end of the year. The purchases will be conducted by asset managers selected through a competitive process. “Purchases of both direct obligations and MBS are expected to take place over several quarters,“ said the Fed’s statement, adding that further details would be provided after consultation with market participants.”

The announcement explains Treasury Secretary Henry Paulson’s reluctance to give specifics last week about government plans to buy troubled mortgage assets. Paulson took heat from Congress for retreating from the original focus of the Trouble Assets Relief Program (TARP).  In a press conference today, reported by Associated Press, Paulson said “It is naive for any of us to think that when you are dealing with a situation of this magnitude that a bill could be passed or a single action taken to make all the issues go away.”

The move appeared to lift the stock market in early morning trading. But by mid-afternoon, the Dow Jones industrials had retreated into negative territory as many investors sought to cash in gains of the previous two days. Builder stocks, as measured by a Dow Jones Wilshire U.S. Home Construction Index, were up more than 10 percent through mid-afternoon trading.

Separately, the Treasury announced another program today to prop up the markets for consumer lending. The Treasury will provide $20 billion in credit protection from last month’s $700 billion bailout package to the Federal Reserve in connection with a $200 billion loan facility. The Fed will lend up to $200 billion to holders of securities backed by consumer loans of different kinds.