Mortgage Rates and the Federal Reserve’s Departure

Today, the Federal Reserve will cease its program of buying $1.25 trillion in mortgage bonds, once again ushering in the return of mortgage loans retained by private investors. Despite low current mortgage rates, interest rates have increased this past week and mortgage rates are expected to rise over the next few months. While there is no certainty as to how smoothly the transition will go and how mortgage rates will truly be affected over the next year, investors remain optimistic. According to Christopher Sebald, chief investment officer for Advantus Capital Management, “What we are seeing is an effective handoff occurring between the Fed and industry buyers such as banks and pension funds. I thought the Fed’s exit would leave a bigger void.”

In January 2009, the Fed began buying loans guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae in an effort to reduce financing costs for borrowers and assist a stressed U.S. housing market. As a result of this activity, mortgage rates dropped significantly and have remained at or near historic lows. According to Fed Chairman Ben Bernanke, “A range of evidence suggests that these purchases and the associated creation of bank reserves have helped improve conditions in mortgage markets and other private credit markets and put downward pressure on longer-term private borrowing rates and spreads.”

As the U.S. economy continues to show signs of sustained recovery and is expected to grow by 3% in 2010, institutions will have more capital to invest in mortgage-backed securities. Additionally, stricter lender standards have made the aforementioned mortgage-backed securities more attractive to private buyers interested in diversifying their portfolios because they ensure that there will be fewer loans on the market. According to a recent report from Morgan Stanley, approximately $1.5 trillion of agency mortgage-backed securities will be issued in 2010, down 12% from 2009.

Nevertheless, there is a significant amount of uncertainty surrounding the Fed’s departure when the housing market and recovery remains fragile. While Fed policy makers have assured investors that they will restart the mortgage-bond buying process program if needed, they are confident that the demand for privately held mortgage-backed securities is high enough to ensure a smooth transition. The Fed’s exit does guarantee, however, an increase in mortgage rates, as Fannie Mae expects an interest rate of 5.13 for a 30-year fixed mortgage in the second quarter 2010.

Total Mortgage Services offers some of the lowest current mortgage rates in the country. Take advantage of low mortgage rates and the soon-to-be-expiring homebuyer tax credit to refinance or purchase your home today by calling 877-868-2509.

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