Fed Planning Exit…higher rates coming?

The Federal Reserve yesterday released an outline of their plan to remove the financial marketplace from the supportive influences of accomodative policy. Part of this outline included a statement on the fate of the Agency MBS Purchase Program.

Here are the comments:

“The Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March”

Plain and Simple: NO CHANGE IN TONE FROM BERNANKE ON THE END OF THE MBS PURCHASE PROGRAM. Funds are still on schedule to run out at the end of March.

While this is a necessary step in the overall recovery process, there will still be consequences to manage.

Even though we have been reminded that the Treasury is providing confidence boosting, the general “up in the air” condition of Fannie and Freddie combined with the loss of Federal Reserve MBS funding are expected to push mortgage rates higher. 

The timing of this move has increased nervousness about the outlook for housing. The Fed will be exiting the mortgage market just as the spring/summer home buying season is expected to pick up steam. Naturally, the question everyone wants addressed is:

HOW MUCH WILL RATES RISE?

Without going into servicing valuations and best executions options, mortgage rates are dependent upon the mortgage basis. The mortgage basis can be generally thought of as a guidance giver for mortgage rates. Rates will generally be a factor of:

1. The direction and movement of benchmark Treasury yields
2. The perception of risk in holding mortgage-backed securities as an investment (loss of principal investment)
3. Supply and Demand in the agency MBS market

Plain and Simple: the Fed’s asset purchases reduced interest rate volatility.  Lenders do not like interest rate volatility….less of it helps keep mortgage rates low relative to Treasury yields. Because the Fed is not planning on offloading their holdings anytime soon, interest rate volatility should remain low.

But do mortgage rates even matter ?

Yes they matter, but not as much as most think. Rates are low right now and many analysts are calling for higher rates in the near future…that should be boosting home buyer demand right now, before rates rise. Yet purchase demand continues to put along near 12 year lows. Low rates are not helping right now…will they make much of a difference in two months? While mortgage rates are easy to pin the blame on, the problem runs much deeper than borrowing costs. 

Housing needs qualified borrowers, its all about JOBS JOBS JOBS!