This big question on a lot of minds is how much should we expect mortgage interest rates to increase when the Fed discontinues its purchasing of mortgage backed securities at the end of this month. The reality is that nobody knows. If the markets step up the impact could be fairly small, if not, rates could shoot up. Here is an excerpt from a recent MoneyWatch piece on the subject:
The bigger concern for higher rates, however, may be what happens to the market prices for mortgage rates, as the Fed stops supporting the market for mortgage-backed securities (in the course of the various rescues it has bought over a trillion dollars’ worth). Most economists are nonchalant, but they also confess to not really knowing what might happen. …
And we know that when the credit markets seized up in 2008, so did the MBS market. The Fed came in and bought up much of the MBS on hand, and since then has been buying much of the new supply of MBS, and thus has been a crucial source of funds for creating new mortgages. And because the Fed is the Fed, and wants to help the economy get going again, rates on mortgages have held at very low levels.
Consider this — even though the structure through which most of the mortgages in the U.S. have flowed since the early 1980s went through a big freeze in late 2008, interest rates are at record lows. That illustrates how powerful our Fed is.
What happens at the end of March, when the Fed stops its support of the mortgage market? In the latest report of its balance sheet, the Fed owned $1.029 trillion of MBS, an increase of $960 billion from a year ago. I don’t know how much was just laying around unbought, and how much was created since the crisis, or how much slack the “real†MBS market will have to pick up. But it has to be big, even in a slow housing market.
