Monday, February 1, 2010

Fed To End MBS Purchase Program

There was major economic news on many fronts this week, with mixed results for mortgage markets. The Fed statement essentially followed the expected script, demand was strong for the Treasury auctions, and much of the economic data released during the week was stronger than expected. The net effect was a small increase in mortgage rates during the week.
As expected, the Fed made no change in the fed funds rate on Wednesday. The biggest surprise was that the Fed's Hoenig dissented from the decision, as he believes that economic conditions have improved enough that the Fed should begin to tighten policy. The Fed's outlook for the economy was slightly more positive than in the prior statement. The statement repeated that the mortgage-backed security (MBS) purchase program will be concluded by the end of March. Some investors were disappointed that the Fed didn't show more support for a possible expansion of the MBS purchase program, and mortgage rates rose after the news.
There is a wide range of expectations in the investment community about the impact of the end of the MBS purchase program on mortgage rates. The Fed has been purchasing roughly 75% of new MBS issuance, and a decline in demand from one source normally leads to higher yields to attract other buyers. One argument, however, is that the end of the program has been expected for quite a while, so mortgage rates already reflect the news, and there could be little reaction over coming months. Other analysts predict an increase in mortgage rates of as much as one percent. The Fed itself expects a small increase in mortgage rates as a result of the end of the program. For more information on your mortgage needs, please e-mail me at keith@frontstreetmtg.com.

Tight Lines,

Keith

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