Let the “Great Mortgage Rate Debate” begin. After more than a year of artificially holding mortgage rates at historic lows, the Federal Reserve will complete its commitment to purchase $1.25 trillion in mortgage-backed securities in exactly two weeks. So what will happen to mortgage rates on Thursday, April 1? I guess it really depends on who you ask. Some mortgage analysts believe mortgage rates will spike to the 6% range while others are on the polar opposite end of the spectrum with the belief mortgage rates will remain low for an extended period of time.
Both sides of the argument offer valid points. For those of the belief that mortgage rates will remain low trust that the federal government will certainly not allow the housing market to tumble back to where it was before the economic meltdown began. All of the hard work to bring the housing market back from the brink of collapse would be for naught. Those of the belief that mortgage rates will rise sharply would counter with: if the Federal Reserve is not buying the mortgage-backed securities, then who will?
The answer is quite simple. In yesterday’s press release, the Federal Reserve stated, “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.” Previously, William C. Dudley, President of the Federal Reserve Bank of New York, indicated that the Federal Reserve may choose to buy additional mortgage-backed securities beyond the $1.25 trillion they are obligated to purchase by March 31. “Obviously, if mortgage rates were to back up a lot and if that had a big consequence for the economy, then we very well could rethink the issue about whether we wanted to buy more mortgages.”
This forward thinking leaves many to predict the real estate market will falter yet again without the coddling of the Federal Reserve. For the short term, mortgage rates may remain low, but it appears painfully obvious the Fed has been expecting such a circumstance for a while. Once mortgage rates begin to steadily increase, the Federal Reserve seems to be prepared to jump back into its purchasing program.
Will mortgage rates climb? For the short term, no. But once mortgage rates do begin to show signs of rising, it appears they will be artificially brought back down again.
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NYTimes
March 18, 2010 @ 8:54 am
– From NY Times –
Fed Affirms Plan to End Mortgage Intervention
March 17, 2010, 3:09 am
The Federal Reserve on Tuesday affirmed its plan to stop buying mortgage-backed securities, expressing a degree of confidence that it could eliminate that pillar of support without undermining the nation’s economic recovery, Sewell Chan reports in The New York Times.
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