What FED can do about mortgage rates?
Published on: Wed, Jun 24, 2009
Classified as: Interest Rates, Mortgage
A meeting of The Federal Open Market Committee held today, and while any changes to short-term interest rates are light-years away, many have the question in their minds that if the Fed will further target long-term interest rates.
In Treasury yields an early June spike had the 10-year note touching 4 percent and conforming 30-year, zero-point fixed rates reaching up to 6 percent. In treasury approximately $1 trillion are left, GSE debt buybacks and mortgage-backed over the balance of 2009, now with this it become possible to stop mortgage rate from rising further.
But in the Mortgage Bankers Association Applications Survey Refinance Index from May 20 through June 17 of this year there has been a fall of 58 percent which shows that to stop the mortgage rates from rising further and to push mortgage rates down to such levels that generate a frenzy of refinancing and home buying activity are two different things. And there difference is too big than what we think.
So now there is a question that arises in every one’s mind and that is
What FED can do, and what, if anything, will they do?
Following are the options that are available to FED
• They can accelerate the pace of purchases,
• They can increase the amount of purchases,
• They can extend the time period over which the purchases take place
• Or they should do nothing further than what they have already announced.
What if they accelerate the pace of purchases?
If FED opts to accelerate the pace of debt purchases then due to this more of that remaining money shall be pumped into bond markets ahead of its time and this could possibly help in bringing the rates down from current levels.
What if they increase the amount of purchases?
It seems that increasing the amount of the purchases is an obvious answer; after all, this idea worked well in November when the initial mortgage debt buyback was announced and it worked again in March when the program was increased and extended to include Treasury debt.
But a further increase to the amount in play could not be a good decision as it may do more harm than good. Starters were concerned about the eventual inflationary consequences which results due to the reason that so much stimulus was pumped into the economy that results in the rise in rates in the late May/early June. By increasing the buyback program those concerns shall only be exacerbated. And it doesn’t change the dynamics of the real estate market even if the Fed get success in bringing mortgage rates lower, there would be surely be a surge of refinancing applications, but those are just applications and not loan closings.
There are a lot more other obstacles between loan application and closing day, that includes sufficient equity issue or being too far upside-down to qualify; for debt ratios tighter underwriting guidelines, credit scores and proof of income; and under the new Home Valuation Code of Conduct an appraisal ordered shall whether be in favor or against the deal.
Mortgage rates are still low enough for homebuyers that they’re not an impediment to a well-qualified buyer and the dilemma of the buyer’s down-payment could not even be solved by lower mortgage rates.
What if they extend the time period over which the purchases take place?
The time period of the purchases could be extended by The Fed beyond 2009, but that bring no change in the current level of bond yields and mortgage rates while they may help in potentially diluting the effect of upcoming buybacks.
What if they make no Further Announcement?
The last option that FED has is that, the Fed could probably administer the silent treatment and they should make no announcements about any further changes. Only the long-term rates will be affected by this “let the chips fall where they may” policy if it deviates from expectations.
And what should we expect from them?
The post-meeting FOMC statement will come up with an economic assessment mostly the same as following the April meeting. As we can see the recent rise in energy prices, so we can expect from FED that they give a nod to the inflation concerns by expressing their intention to maintain price stability.
And we also expect an acknowledgment for the improvement in financial markets as the TED spread i.e. the difference between 3-month LIBOR and 3-month Treasury yields that reflects tensions in interbank lending — has lowered down to pre-credit crunch levels of 43 basis points.
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