HomeSection.comHomes By Herman

Is The Party Over For Low Mortgage Rates?

March 31st, 2010 categories: Buying, Loans / Financing, The Economy

March 31 - Uncle SamWill Rates Skyrocket As Some Previously Predicted?


Today marks the end of an unprecedented era for the mortgage market.

That’s because this is the final day of the Federal Reserve’s 14-month program to buy up mortgage-backed securities (MBS) — a practice that has kept mortgage rates down in the 5-percent-and-below range.

The Fed’s MBS purchase program was initiated by the government in order to keep mortgage money flowing at the time our economy was suffering through its darkest hours.

Buoyed by a consensus that the economy was on the mend, last fall, the government proclaimed that it would end its MBS buy-back program by the end of the first quarter of 2010.

In other words: today.

A New Era Starts Tomorrow

So starting tomorrow, MBS purchases will fall on the shoulders of regular investors, which means that mortgage rates will again be determined by the free marketplace, without any governmental support.

Pull QuoteBefore I lose you with too much high-finance talk, let me explain what this really means to the average home buyer or mortgage consumer.

In a nutshell, if the people who purchase these mortgage backed securities don’t buy them at the same pace that the federal government has been purchasing them, then mortgage rates will climb.

For weeks now, many “mortgage scholars” have been predicting that we’ll see a spike in mortgage rates as soon as the government exits the MBS arena.

6% Mortgage Rates Overnight?

Some have said that rates, which have been hovering in the high-4% to low-5% range for months now, could rise to the mid-5’s or even 6% within a matter of days or weeks after the Fed’s program goes away.

In recent weeks, some of these experts have scaled back their doom-and-gloom predictions and said that rates will probably go up a bit, but not perhaps as high or as quickly as they previously envisioned.

Before the government started buying MBS’s in Jan. ‘09, the flow of mortgage money had reached a serious bottleneck, as back then, very few investors were excited about putting their money into an investment that was backed by the ability of American homeowners to make their mortgage payments.

And without anyone to invest in those MBS’s, the supply of mortgage financing would have dried up almost instantly, which would have devastated an already punch-weary housing market.

Uncle Sam’s $1.25 Trillion Life Preserver

So in an effort to keep mortgage financing flowing and prop up a weakened housing market, Uncle Sam announced in Nov. ‘08 that it would allocate $1.25 trillion to purchase mortgage-backed securities starting in Jan. ‘09.

The theory was that by the time that money was gone, the investment community would again have enough confidence in these securities to keep mortgage money flowing.

The big unknown at this point, of course, is just how much confidence investors really have in these MBS’s.

Or, more importantly, whether they’ll buy them at the same pace or at the same cost as the government has been doing for the past 14 months.

In anticipation of this day, the government started scaling back its MBS purchases last fall in order to hopefully create a gradual transition from governmental support to free-market investors.

Since rates have stayed in the same general range since the government’s phase-out began, that’s considered a good sign — and one which has convinced some of the doomsayers to reconsider their original predictions of interest rates climbing a full percentage point in a matter of weeks once the government buy-back program ended.

Tomorrow Is Day One

So now we’re at ground-zero. Tomorrow is Day One of a new era. Or should I say a return to the way things were done before the mortgage meltdown.

That means we’re about to find out just how much our economy has recovered.

Most experts seem to think that rates will probably go up at least a little bit — perhaps somewhere between 1/4 to 1/2 percent in the coming weeks.

If such an increase occurs over a 5-6 week period, I wouldn’t expect it to impact the housing market too much.

But if rates were to rise quickly or by more than 1/2 percent, then the real estate market could take a hit — especially since it would coincide with the end of the federal tax credit and the introduction of FHA’s tighter new policies.

RECENT POSTS

MARKET UPDATES

listings-by-mls-button news-by-email-button search-the-mls-button

This entry was posted on Wednesday, March 31st, 2010 at 4:28 pm and is filed under Buying, Loans / Financing, The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply