Posts Tagged ‘mortgage backed security bonds’

A round of applause

April 13, 2010

Seems people like to give the government (President, Congress, Federal Reserve, etc.) a hard time when things don’t go as planned. Rarely  does anyone give them the credit they sometimes deserve.

In regards to the Federal Reserve’s plan to lower interest rates and stabilize the mortgage back security bond market (MBS bonds), the Feds deserve a round of applause.

During the initial stages of the current financial crisis (when the markets were in total disarray), the Federal Reserve stepped in to the spotlight. The Feds announced a plan to buy MBS bonds with two goals in mind – to stabilize the value of MBS bonds and push interest rates down below 5%.  The Feds succeeded on both objectives, extended the program twice (for a total of 15 months), and spent over $1 trillion (yes, that is a “T” for trillion) buying MBS bonds.

The new concern became what would happen once the Feds program ended. Posts on this blog theorized that if MBS bond prices soared (and interest rates dropped) on the announcement of the plan in November 2008, wouldn’t the opposite occur once the Feds were finished buying MBS bonds?

Initially that theory proved to be right. In the first couple of days after the Feds stopped buying MBD bonds, those bonds dropped over 100 basis points in value and interest rates rose 0.25-0.375%. However, as the Feds bowed out of the MBS bond market, other investors have picked up the slack. For instance, since the Feds have kept the Federal Funding Rates near 0%, money managers, pension funds, etc. are moving away from playing it safe and keeping cash “on the sidelines” and are now investing in MBS bonds.

In the end, the plan seemed to work like a charm. The Feds were able to push rates below 5% (back below 5% at the time of this posting), stabilize the MBS bond market, and encourage other investors to pick up the slack as they slowly moved away from buying MBS bonds.

Even though the MBS bond market is now performing without a net, the initial “sky is falling” scare is over and interest rates have rebounded to their levels prior to the Feds leaving the MBS bond market. Who knows how this plan could affect the market a year or two down the road, or how rates will respond if they begin moving in the wrong direction (when they do rise, expect it to be sudden and without much warning), but at least for today, credit should be given to the Feds. Thus far, everything is going according to the plan they laid out. Besides, something bad could happen and we’ll think their idiots again tomorrow 🙂

That was fast – rates on the rise

April 2, 2010

Less than 48 hours after the Feds stopped purchasing mortgage backed security bonds, interest rates have already jumped 0.25% for a 30 year fixed mortgage. For information on the Feds buying MBS bonds or how this affects interest rates, see yesterday’s post OR this one OR this one OR this one… you get the idea.

The trading today has been very limited because of the holiday. That may also be why the Feds chose this date to hop out of the bond buying market. The real reaction will begin on Monday.

Regardless, lenders are pricing interest rates on more of a worst case scenario basis, thus the quick jump in interest rates. If Monday is a flat or good day for bonds, rates may stabilize and possibly move lower. However, most investors are just looking for a reason to doubt bonds and feel it is inevitable that interest rates will continue to rise. Either way, Monday should be interesting.

Waiting to lock?… don’t. As many people have said (including posts on this blog), as low as rates have been, they have nowhere to go but up.

Performing without a net

April 1, 2010

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!

is the (low mortgage rate) party over?

February 9, 2010

The party is just getting started in New Orleans (Super Bowl win + Mardi Gras = month long celebration), but it may soon be coming to an end for historically low rates.

Enjoy it while you can!

Mortgage rates hit historic lows in 2009 thanks to the extraordinary efforts of the Federal Reserve.  Back in November 2008, the Feds announced a program to buy mortgage backed security (MBS) bonds.  The reasons were two fold:

  • to help push mortgage rates lower to stimulate the real estate market
  • to create a market (or in other words, increase the value) of MBS bonds for others to buy

When the plan was announced by the Feds in November 2008, interest rates dropped roughly a half point in one day!  As the Feds began buying bonds, rates dropped down to their historic lows. The initial plan was to buy bonds through the first six months of 2009. It was extended through 2009, and extended again through end of the first quarter 2010.

At their recent meeting, the Feds reiterated their intentions to “seamlessly exit” the MBS bond market with no hint at another extension to the MBS bond buying program.  The question now is “what happens to mortgage rates?”  Take a look at the chart below.

Since mortgage rates dropped significantly on the announcement of the plan, and then continued to improve to historic lows as the Feds purchased MBS bonds, one would logically expect the opposite reaction once the bond buying program comes to an end.  In this case, and at least to some degree, interest rates should rise.

How should you proceed? Anyone who hasn’t refinanced OR is waiting until the deadline to take advantage of one of the home buyer tax credits, go ahead and get prequalified today.  Move forward with the loan now while rates are still ridiculously low.

There is not guarantee rates will dramatically increase, but also no guarantee they will stay the same.  Take advantage of the market and low rates while they are still available.