The Fed and Mortgage Rates
The Federal Reserve Bank has committed to buy half a trillion dollars worth of FNMA and FHLMC mortgages in the secondary market this year. Due to the first two weeks of their purchases, the Fed and bought about $33 Billion so far. Other than the Fed, there are comparitively few other buyers for mortgage backed securities. This is evidenced by the very low rate on Treasury Bonds compared to FNMA mortgage backed securities. As a result, the usual market motivations that move mortgage interest rates do not influence mortgage pricing as they have in the past. Some mortgage interest rate watchers weigh the rate on 10-year treasury bonds as an indicator of mortgage interest rates. I believe this is not a very useful guage, and it is even less helpful in these market conditions. Watch the prices of mortgage backed securities.Why this matters
- If you are waiting to lock in a mortgage interest rate for a purchase or refinance, add the Fed's plans to your survey of market conditions. Before 2009, your mortgage professional would watch for releases of economic data to guide them to a good time to lock a mortgage interest rate. It used to be that bad economic news generally moved mortgage rates down. For example, if unemployment was up or retail sales were down, interest rates would be expected to decline. Low inflation also helps interest rates to move down.
Last week, there was a plethora of bad news about the economy. Huge job losses. Very low inflation. Lots of layoffs. Dismal retail sales in December, 2008. Yet, the mortgage rates ticked up from the previous week when the Fed started buying mortgages. When the Fed announces a major purchase, or commitment to purchase, mortgage back securities, rates take a large move down. This seems to be caused by the relative lack of mortgage market participation by investors other than the Federal Reserve. The Fed currently has the greatest influence on the direction of mortgage interest rates and the availability of mortgage funds.Interest rate expectations
- If the economy is near the bottom (I think we may have a way to go yet), rates will increase. If the Fed slows, or stops, buying mortgages, rates will go up. If the amazing amount of money the Fed is printing will bring inflation, rates will go up. If the market perceives that our new president's policies will pull this economy out of this current condition (I hope this happens), rates will increase.
On the flip side to the prognosticator coin, what events or market expectations will move mortgage rates lower than they are now? Even more government intervention in the mortgage bonds market? Is that likely to happen beyond the current commitment of $500,000,000,000? So, consider this moment in the market as a great opportunity to grab a great long term mortgage interest rate for buying a home or refinancing your current home.
You can contact me at email@example.com. I also publish a weekly mortgage interest rate report for residential real estate professionals at my website, www.markgoldman.com.