New Fed Programs Help Mortgage Rates

This week, the Fed announced new measures to boost the economy. Expectations are low for much economic growth to result from the measures, but they did help push mortgage rates to historic lows.

The Fed released its statement Wednesday afternoon, and MBS markets then staged a very strong rally for several reasons. First, quite simply, the Fed confirmed that there are “significant downside risks” to the US economic outlook. Slower economic growth reduces inflationary pressures, which is favorable for mortgage rates. Second, the Fed announced the widely expected Operation Twist program.

This program will extend the average maturity of the Fed’s portfolio by purchasing $400 billion of longer-term Treasury securities and selling an equal amount of shorter-term Treasuries. The third major element from the statement helping mortgage rates was a surprise to most investors. The Fed will begin to reinvest principal payments from its mortgage-backed securities (MBS) holdings in additional agency MBS. Until now, the Fed has been reinvesting the MBS principal payments in Treasury securities.

With roughly $885 billion in MBS holdings in the Fed’s portfolio, these principal payments, along with Operation Twist, will create a significant source of additional demand for MBS. The impact of the announcement was priced in very quickly. Although the Fed has not yet begun to purchase securities under the new programs, investors have already factored in the expected impact of the added demand on MBS prices. Following prior Fed announcements about purchasing MBS, nearly all of the benefit took place right away.

Also Notable:
• August Existing Home Sales rose 8% from July
• The IMF downgraded its forecast for global economic growth
• S&P cut Italy’s debt rating again
• Oil prices fell to $80 per barrel from $90 per barrel last week

Week Ahead
Next week, New Home Sales will be released on Monday. Durable Orders will come out on Wednesday. The final revisions to second quarter GDP will be released on Thursday. Pending Home Sales, a leading indicator, will also come out on Thursday. Friday will be a big day with Core PCE inflation, Personal Income, Chicago PMI Manufacturing, and Consumer Sentiment. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

To learn more about news impacting interest rates and mortgage markets, go to www.mbsquoteline.com
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Roger Odoardi

Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.