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What Does the Fed’s Statement Mean for Mortgage Rates?

Posted by Larry Doyle on September 23, 2009 3:40 PM |

The Fed’s statement at 2:15pm had no real surprises, but there is one development that bears comment — especially for anybody looking to finance or refinance a home.  The Fed stated:

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

What does this mean? The Fed’s program of buying mortgage-backed securities to support housing was scheduled to end December 31st. It will now be extended through the end of the first quarter 2010. The fact is, though, the Fed is not purchasing more MBS (mortgage-backed securities) than the previously advertised $1.25 trillion. The Fed is merely lengthening the time over which it buys those MBS.

Add it up, and the largest buyer of MBS in the market will have a lessened impact because its purchasing power is being diluted via this extension. As a result, overall conforming mortgage rates will not likely come down much if Treasury rates were to continue to decline. By the same token, if Treasury rates were to rise, mortgage rates will likely rise at an even faster rate.

Recall that just the other day Wells Fargo CEO John Stumpf shared that his bank was not purchasing any MBS for its own portfolio nor was it retaining any of its own mortgage originations. Why? From a pure relative value standpoint, MBS are overvalued. Why? The Fed has effectively been overpaying to buy MBS in an attempt to get mortgage rates down and support housing.

With the end of the Fed’s purchase program on the horizon, mortgage rates will likely start to move higher in order to attract other potential investors.

What is a homeowner to do? Don’t wait to refinance thinking that rates are going to come down much further.


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