Let’s take a closer look at what this REALLY means: Barry Habib-CNN Analyst, Mortgage Market Guide: Although the media is already spinning it differently, this is still not a time for clients to stay on the fence, hoping and waiting for lower rates. Home loan rates remain within inches of all-time historic lows, but may not necessarily move significantly lower based on this purchasing plan – waiting is a very risky move. Big news hit the wires yesterday afternoon, as the Fed made a blockbuster announcement that sent Mortgage Bonds into rally mode. The Federal Reserve announced that over the course of 2009, they will purchase an additional $750B of Mortgage Backed Securities in an effort to help shore up the housing market and keep home loan rates low. On the announcement, Mortgage Bonds exploded higher, leaving prices within whiskers of the best levels ever.
However, be sure to share with your clients that based on which coupons the Fed purchases (5% and 4.5% coupons), their actions may keep a lid on rates, but not necessarily push them dramatically lower. And due to the issue we’ve also discussed of lenders still not working at max capacity, they are very likely not going to pass all the gains through to the rate sheets, as we are already hearing this morning. The good news is that perhaps this will help lenders feel more comfortable staffing up a bit, as this purchase program will certainly keep rates from moving significantly higher any time soon.
The Fed also said they will purchase $300B in long term Treasuries…so why Treasuries? The Fed wants to keep the spread between Treasuries and Mortgage Bonds from widening, because as Mortgage Bond prices move higher, the yield or return on them may not be as attractive as those available in Treasuries. So if the Fed buys Treasuries, the yield on those instruments will also be driven lower, thereby keeping a normal spread between Treasuries and Mortgage Bonds.
The Fed also said that the buying of 2-year and 10-year Notes will help push down rates on business and consumer loans – good news there to help incent business and consumer purchasing. Both Stocks and Bonds sure liked what they heard from the Fed, and financial stocks have continued their recent tear higher.
SPECIAL NOTE: Barry is scheduled to appear on FOX Business News this afternoon, around 2:30pm ET. Tune in as he discusses some of the important issues surrounding the mortgage and financial industries.
Mortgage Lending Officer
1 Stop Mortgage, Inc