Can the Fed find a way to keep mortgage rates low?
As I write this on Thursday morning, the financial community waits to see what the fallout of Wednesday’s bond market implosion will mean to mortgage rates and the prospects for recovery.
In case you hadn’t heard, the bubble on the low rates we have been enjoying since December exploded, at least for now. In the last six months the Obama administration committed that it would pump over $1.2 trillion into the mortgage markets. The hope was this would drive down mortgage rates and revive the housing markets.
However the flip side of the coin is that the Feds faced the dilemma of either printing or borrowing this money via the sale of bonds, along with the rest of the cash promised to buy our way out of a recession. While printing sounds easy enough it is far more dangerous to the economy than borrowing, which isn’t real great either.
Printing money will in time devalue the money that is out there by fueling inflation and decreasing foreign demand for U.S. dollars. As I have noted before, history is littered with spectacular instances of failed governments that thought they could print their way out of debt.
Borrowing money is OK in moderate doses as long as you can afford to pay it back and someone is willing to lend it to you. China has been quite generous about buying U.S. debt, but even they will at some point tire of buying endless amounts. Indeed, they have been sighing a lot lately about how much U.S. debt they hold.
It is projected that the U.S. will be issuing about $200 billion a month in new debt of longer than 12-month maturity for the foreseeable future. This has got to push up rates to attract investors, but it will also have the undesired effect of pushing up mortgage rates that the Fed wishes to drive down. It is, as they say, a conundrum.
To an extent, the Fed can also print money and buy its own debt; this has somewhat less risk than just printing the money and spending it because the Fed can pull the money out of circulation at some point by just paying itself back as tax revenues allow.
All of this has served to drive mortgage rates down into the mid to upper 4 percent range, until Wednesday, when the bubble burst and the yields on mortgage-backed securities soared as investors finally said enough is enough and started demanding a better return on their money. In a few hours most mortgage rates zoomed up as much as a half-point to three-quarters point, putting them in the low 5 percent range, right back where they were before the Fed started intervening.
Today would be a very interesting day to be a fly on the wall in Ben Bernanke’s office. This may prove to be a day of reckoning for the Obama administration’s dreams of buying our way out of the recession via racking up endless debts. Essentially the markets have proven that they will not be subject indefinitely to government intervention, and like the spring runoff in the Eagle, when it comes it comes and you can’t stop it.
It’s entirely possible the government may find a few hundred billion more to pump into the mortgage markets, driving rates down again. But if this happens, just remember that when rates change again it is because they are being held down against every law of natural economic cycle and in time nature always wins. Hopefully we can buy enough time to where the recovery takes hold and the demands of nature are less brutal than they are right now.
Chris Neuswanger is a mortgage loan originator for Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related inquires from readers.