Archive for April, 2010

The Fed exits the MBS market as loan officers everywhere begin holding their breath.

Towards the end of 2008, in an effort to spur the housing market the Federal Reserve began buying Mortgage Backed Securities (MBS or “mortgage bonds”).  Since mortgage rates are derived from MBS, the Fed figured they could keep mortgage rates artificially low by manipulating the prices of those bonds.

Like a teenager with their parent’s credit card, the Fed bought, and bought, and bought mortgage bonds ($1.25 Trillion to be exact) while mortgage rates steadily dropped to levels not seen in 60 years.  In short, the plan worked beautifully.

But the plan had to end.

On March 31st the Federal Reserve stopped their purchase program, and mortgage professionals across the country began nervously watching the market to see how rates would react.  A clear-cut debate raged on in the months prior to the March 31st deadline; would rates slowly trickle up, or violently spike once the Fed left the market?

Interestingly enough both sides were right….for now.

In the 48hrs after March 31st, interest rates jumped between 0.25% and 0.375%.  Since that time, however, rates have trickled back down.  The long term effects of the Fed leaving the MBS market truly remain to be seen.

Although, not everybody is predicting an immediate and drastic rate jump.

In an article published March 30th at Bloomberg.com (the day before the Fed’s program ended), columnist Kathleen Howley suggested that low mortgage rates could stick around for some time as institutional investors (banks & pension funds) replace the Fed’s MBS buying efforts.  Also noted is the fact that the Fed could jump back into the MBS-buying game if higher rates cause the housing market to backslide.

So…..will rates jump up, or simply bump up?  In the end nobody knows for sure – but I for one remain optimistic that rates will stay relatively low in the face of the Fed taking their ball and going home.  After all, the alternative scenario doesn’t seem so pretty.

Rates aside, if you’re looking to get in to the market (either by purchase or refinance), now is your time.  Rates are still phenomenal, home prices are low (for now), and there’s still time to cash-in on the tax credit for buyers.  Better to act now as the light dims on these government programs, than to wait around for a deal that may never come around again.

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Nick Mallory is an active loan officer in Portland, Oregon.  Have any questions or comments about this post?  Visit the contact page and drop Nick a line.