Tag Archives: fed buying mortgage backed securities

The Party Might Just Be Ending for Low Interest Rates

It’s safe to say that mortgage interest rates have been at historic lows since the summer of ’09, mostly around and sometimes even under 5%.  Currently, they’ve been floating around the 5 & 1/8% range.

Part of the reason for these low rates has been because the Fed has been on a buying binge of Mortgage Backed Securities (MBS).  The Fed has been buying $1.25 trillion in mortgage-backed securities in its effort to prop up the economy but has said it will end those purchases March 31.

As I speak fairly regularly with seasoned, well-informed, and intelligent mortgage lenders and brokers, one thing they all seem to agree on is that the expectation is that, after March 31st,  rates will head upwards, and will likely be in the 6% range.

Still pretty low, historically – but, a significant impact to the buying power of home buyers out there.

Just think about it, if you’re looking at a loan amount of say $700,000, this means that a 1% increase in interest rate translates to paying $450 MORE per month on the same loan.  Or looked at another way, a 1% increase in rate just reduced the sale price you can afford by about $80,000.

Quoting some highlights from a recent WSJ article:

What happens when it (the Fed) stops buying hundreds of billions of dollars in financial assets?

In its monetary-policy statement, the Fed said it would “gradually slow the pace of these purchases in order to promote a smooth transition in markets.” Suddenly cutting to zero, presumably, could prove too much of a jolt.

But even a gradual pullback could have big repercussions. Zero interest rates and Fed purchases — financed by printing money — have played a massive role in reviving stocks and bonds and rekindling the economy.

Mortgage rates will likely move up, as private-market buyers will charge more than the Fed for bearing the risks of holding government-backed mortgage securities. Now, the Federal Reserve has said they would consider reopening its program to support the mortgage market if interest rates spiked or the economy showed new weakness

In its best corporate-speak, the Fed said they will “evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”  That is, if markets play along. Investors are already balking at the heavy use of printing presses. Just look at the sliding dollar.

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