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August 16th, 2010

Fed’s move: Good news for mortgage rates

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Last week the Federal Open Market Committee (FOMC) announced that they “will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.”

While that sounds like a technical mouthful, in essence it simply means that the Fed will re-continue a program that’s aimed at keeping long-term interest rates (e.g. 30-year mortgages, 10-year Treasuries) low for an extended period.

The immediate impact of their announcement isn’t expected to be too pronounced, given the fact that mortgage rates are already at record lows. Yet what I found to be most significant in regarding this announcement is the Fed’s acknowledgment that the economic recovery isn’t getting better to any real degree. This program will serve as a back stop for future deceleration, if that does occur.

How did rates react?

Mortgage rates dipped almost immediately following the Fed’s announcement last Tuesday. “This decline was probably related more toward a loss of optimism about the economy and reduction in concerns over inflation than any anticipated support for mortgage markets,” according to the latest issue of HSH.com’s Market Trends Newsletter:

Every week throughout its 30-year history, HSH has produced an overall mortgage monitor — our Fixed-Rate Mortgage Indicator (FRMI) and never before have we seen values at these ultra-low levels. The FRMI includes rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public. The FRMI shed eight basis points (.08%) [last] week, finishing the period at 4.79%. If anyone wants them, an alternative to a fixed-rate mortgage can be found in the form of a Hybrid 5/1 ARM; these shorter-term solutions can be had at an average rate of just 3.77%.

Was this meant more for the private market?

With the announcement’s immediate effect on mortgage rates evident in the numbers above, I posed the question to readers last week: “What good are (even) lower mortgage rates?

Realizing that rock-bottom mortgage rates weren’t bringing all that much relief to an ailing economy, I couldn’t understand why the Fed would announce a program that will essentially continue to improve an area of the economy that doesn’t need improvement. After talking it over with a colleague here at HSH.com, we began to wonder if the Fed’s announcement was an indirect way to get private investors re-interested in mortgage securities.

Think about it, if the Fed is buying up Treasuries in bulk, their yields will drop even lower, perhaps persuading private investors to become more attracted to mortgage securities which, despite being in record-low territory, have yields that are about double that of U.S. Treasuries. Furthermore, if more and more investors begin buying mortgage securities as a result, mortgage rates will remain low. This “small, symbolic” move by the Fed could produce tremendous value if things progress in a certain manner:

Whatever boost to the economy accrues to this program will surely be welcome. None of the economic news has been particularly good over the past ten to twelve weeks and there was certainly little to cheer in the latest batch.

CLICK HERE to continue reading the latest issue of our Market Trends Newsletter, “Fed Shifts, Mortgage Rates Do Too.”

HSH.com’s free Market Trends Newsletter, an in-depth analysis of various financial markets from the week prior, is published every Monday. Email subscribers receive it in their inbox Friday night, so sign up today! Also, be sure to check in with our Market Trends blog for all news relating to any weekly shift in mortgage rates.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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