During the past year, the Fed purchased over $1 trillion worth of mortgages in the form of mortgage backed securities. This had the effect of driving interest rates down about 1/2 % point. During FY'09 rates were running about 5% or a little less for a 30 year fixed mortgage. Had the Fed not purchased these, rates would have been running about 5.5%. The net effect was that many homeowners were able to refi their homes and increase their cash flow, which translated into increased consumer spending and a stimulus to the economy.
But, now that the Fed purchased these mortgages and is holding a huge amount of these, at some point they have to unload them. As they do, this will have the negative effect on interest rates - pushing them higher. At this time the Fed it contemplating how to unload them. They have several options, but the most important question is when and how quickly. Since the Fed has said they have no intentions of raising any interest rates soon, they will probably hold these mortgages for several months.
In any case, once they begin to unload them, interest rates will be pushed artificially higher than they would be at that time.
Saturday, April 3, 2010
On March 31, the Fed ended its yearlong program of buying mortgage backed securities - a program aimed at keeping mortgage interest rates low. When they stopped, the impact was immedidate. Rates have risen over a quarter point in the last couple of days.