Neuswanger: Fed actions signal steady mortgage rates for 2019 (column) |

Neuswanger: Fed actions signal steady mortgage rates for 2019 (column)

Chris Neuswanger
The Mountain Mortgage Guy

While the Federal Reserve does not set mortgage rates, its actions have a heavy impact on the direction rates will take, and this week there was some good news for homeowners that the media pretty well missed.

Mortgage money is raised by the sale of bonds to investors. These bonds are generally guaranteed by the federal government and carry virtually no chance of default. The money from the sale of these bonds is used to fund mortgages and they are paid back as the mortgage loans are paid back.

The recent announcements from the Federal Reserve signal good news for homeowners.

During the past financial crisis, starting about 2010, the Fed was faced with a difficult decision: how to pump cash into the economy without triggering runaway inflation. While the Fed could have pumped cash in by literally printing money and handing it out via fat tax refund bonuses (or dropping it from helicopters!) they very sagely chose another path — to invest in mortgage bonds. 

Between 2009 and March 2018 the Fed pumped about $1.8 trillion dollars into mortgage-backed securities, which is an enormous sum, even for the U.S. economy. That’s equal to about 6 million $300,000 home loans. And as any homeowner knows, when you buy a house you need stuff.

This provided cheap gas to fuel the housing recovery, and in addition to stimulating sales, allowed consumers to save billions of dollars on interest via lowering mortgage rates. This method also assured the Fed that it would be able to eventually reduce the money supply by slowly withdrawing its support from the mortgage bonds.

Had the Fed chosen the “helicopter” approach of handouts, the money would have gone out the door and not come back and quite likely triggered inflation, which would have been ruinous to an economic recovery. 

Starting a year ago, the Fed started to gradually withdraw from the bonds.  As consumers paid back their loans, the Fed kept the money, shaved a few hundred billion off the national debt and let the free markets make up the difference. The result was less demand and these bonds were forced to offer a higher rate. That pushed mortgages up about 1 percent. In addition, the Fed began a series of rate hikes on short-term money which also tamped down the economic growth to keep inflation in check.

However, as the housing market has shown signs of stress in recent months, and job growth has hit a plateau and trade issues with China and other countries grow, and the U.S. Trade deficit has expanded, Fed quite publicly announced this week that it is likely done raising short term rates for this year.

What the mainstream media missed though was the second part of the policy statement, and that was the Fed would also slow its withdrawal from the mortgage-backed bond market, meaning that the supply of mortgage money should trend to increase over last year’s numbers. That is outstanding news for homeowners and should herald stable-to-slightly declining mortgage rates for the rest of the year.

Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342.  He welcomes mortgage related inquiries from readers.  His web and blog is 

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