Fed starts purchasing mortgage-backed securities | VailDaily.com

Fed starts purchasing mortgage-backed securities

William A. DesPortes

Ringing in the New Year in epic fashion, the Federal Reserve Board began its mortgage-backed security purchase program on Jan. 5. Through June 2009, $500 billion or roughly $20 billion per week will be spent by the Fed, buying mortgage-backed securities. Purchases are limited to fixed-rate agency securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Deciphering the exact repercussions and outcome of such a plan is difficult.Pure speculation about such action was enough to drive rates for some mortgage scenarios to historic lows. Now that the plan is in motion, rates are continuing to hover around historically low levels. The reason for this is two-fold. The law of supply and demand dictates that when demand for a particular item goes up, prices follow suit. Demand for mortgage-backed securities went up instantaneously with $500 billion allocated from the Fed, pushing prices for mortgage-backed securities higher. When mortgage bond prices move higher, mortgage rates improve and go lower. Theoretically, this purchasing action will also create more liquidity in the mortgage market. As banks and lenders are able unload some of the mortgage debt on their books, they are able to lend more money for new mortgage transactions. The more money lenders and banks have for new mortgages, the lower rates will stay.Unfortunately, long-term interest rates depend upon numerous other factors, such as inflation. Inflationary levels are tame at the moment and even bordering on deflation. However, the amount of liquidity that is being infused in to our capital systems, with the TARP funds and short-term rate cuts from the Fed, has future inflationary implications. Increased inflation will make mortgage rates increase. Fluctuations in the equity or stock markets also effect mortgage rates. Generally speaking, as money flows into the equity markets, it flows out of bonds, causing mortgage rates to rise. Rallies in the stock market could cause interest rates to rise.Such a plan also assumes that banks and lenders will in turn lend out new mortgage money once the securities have been taken off of their books. If new mortgage money is not cycled in to the system, rates could increase.The Fed is indicating that it will continue buying mortgage-backed securities through June, but that is only the proposed plan at the moment. A number of other factors have to happen in order for rates to remain at these historic levels. Predicting how long rates will be low or how low they will go is an exercise in futility. Now is the time to discuss the scenario with a trusted and educated mortgage professional. William A DesPortes is a managing member of DesPortes, Selig & Associates, Professional Mortgage Services. He can be reached at 970-926-9393 or william@dsmortgage.org.

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