We have seen what the future holds in store for interest rates. In late May, Federal Reserve chairman Ben Bernanke appeared and spoke in front of Congress and The Joint Economic Committee as part of his regularly scheduled testimonies there. During the question and answer portion of the testimony, he indicated that the Fed could begin to taper its $85 billion per month bond purchasing program, known as Quantitative Easing Three, as early as the fall of 2013. Panic in both the bond and stock markets ensued.
Included in the Fed’s $85 billion monthly bond purchases are mortgage backed securities. By purchasing mortgage debt directly from banks and mortgage lenders, the Fed has been able to suppress interest rates for quite some time by creating instant and ongoing demand for mortgage debt. This is the sole reason why interest rates were in the low to mid 3 percent range on the benchmark 30 year fixed rate loan for so long. Even though the Fed did not actually start their tapering or pull back on their purchasing in May, banks and mortgage lenders began to instantaneously hedge their bets so to speak by raising rates on the mortgages they offered to ordinary consumers.
Quickly after Bernanke’s statements, he and other Fed officials tried their best to amend or retract the comments and restore calm in financial markets and. However, the damage was done. Between May 1 and roughly June 24, Fannie Mae mortgage backed securities or bonds rose 734 basis points (www.mortgagemarketguide.com). In layman’s, terms this means that interest rates for a conforming 30-year fixed rate mortgage shot up from the low 3 percent range to the high 4 percent range. Again, as banks began to prepare for the lack of demand in the secondary buying markets, even though the Fed had not yet even scaled back by a single dollar, they started raising rates to entice alternate investors with a better rate of return.
Since June a lot has happened. Federal Reserve Board members have continually stressed they will not pull back on the purchasing program until economic conditions warrant or improve. The United States government shut down for 16 days. Those “economic conditions” have not really improved and Fed officials seem to be waiting for the exact ramifications of the shutdown to work their way through the economy. Thus, talk of tapering has ceased and other worries have come to the forefront with investors. Mortgage rates on a conforming 30 year fixed rate have slowly and cautiously come back down in the low 4 percent range. For now that is.
What we saw in that 734 basis point correct or increase is a violent correction to increase to rates that most of us have never seen before. Currently the Federal Reserve, purchases 85 percent (www.bloomberg.com) of all mortgage backed securities on conforming loan amounts through their quantitative easing programs. When, or as the Fed begins to actually taper or pull back on this volume, there will be no other way for banks to unload mortgage debt off of their books than by offering a higher rate of return for other potential investors. Quite simply, this equates to higher interest rates for the consumer.
Make no mistake about it, the Fed will taper their bond purchasing program or Quantitative Easing Three at some point. All indications point that the tapering will occur in the early part of 2014. When this actually begins to occur, interest rates will rise from the range where they are now. We have seen what happened to interest rates with just the indication or the thought that the Fed will take the proverbial punch bowl away. Therefore, I do not believe we will see rates dip much below where they are now if any lower at all. Take the occurrences of May and June as a glimpse into the future and a chance to act accordingly.
William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, ext. 103, and william@ds mortgage.org.