Performing without a net

The safety net is gone. The Feds are finished purchasing mortgage backed security bonds, and their direct influence on mortgage rates is over. Is a mortgage rate Armageddon upon us?

Don't look!! It's a long way down.

Well, no, it isn’t. That said, there could be a market “adjustment”, and here’s why…

In November 2008, the Federal Reserve announced a plan to purchase mortgage backed security bonds to lower interest rates into the 4’s. At the time of the announcement, rates dropped roughly a half a point over night. As the Feds began buying these bonds (increasing their value), mortgage rates fell into the 4’s – exactly as planned!

The Feds offered a “safety net” for bond prices. Investors knew that no matter what occurs in the financial sector, a certain amount of bonds would be purchased every week. This kept bond prices steady during this turbulent market.

Now the market’s “safety net” has been removed, what should we expect moving forward?

  • Considering rates dropped dramatically on the announcement of the plan, an opposite adjustment would logically be expected now that the plan is over.
  • Negative overreactions to financial events/data are back into play now that the Feds will no longer spend billions of Dollars each week buying bonds. Who will make up that gap during poor performing days for bonds?
  • What happens if the Feds now look to sell the bonds they purchased (over $1 trillion worth)? Putting those bonds for sale into a market along with the new bonds up for sale will dilute the market, weaken bond prices, and push rates higher.

In short, now that the Feds are no longer buying mortgage backed security bonds, the only direction rates have to go is up, not down. All the experts agree on that, they just don’t agree on how much rates will increase.

What should you do? If you are still holding out to buy a home OR refinance a home while rates are in the 4’s, the time is now. Get started and lock in a rate while these historic lows are still here!

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