About Government Refinance and Home Purchase Programs

Information and Updates on Government Mortgage Programs
Filed under Government Mortgage Financing Programs News

The Fed has been spending money in two ways to compress mortgage interest rates in 2009. The first way is to buy U.S. Treasury Bonds. By purchasing these bonds the yield on the bonds stays low. This is important because mortgage interest rates have traditionally tracked to about 2% higher than the yield on the the 10 year treasury bond. The second way the Fed is compressing mortgage rates is by purchasing large amounts of Mortgage-Backed Securities (MBS). These securities are basically mortgages that have been bundled together and sold as investments. When the Fed purchases these securities in large numbers the banks have more money to lend for new mortgages and the easier it is for banks to sell the MBS the lower the interest rates they can charge to compete for mortgage business (while still turning a profit). The purchases of the MBS are partially what is keeping the interest rates on mortgages just 2% or so above the yield on the 10-year treasury bond. (Last year the spread grew significantly greater than 2% until the Fed started buying MBS.)

Well a few weeks ago the Fed announced that it will stop buying treasury bonds by October 2009. That could mean that the yield on the 10-year note could go up to 4-5%+ again. If the spread remains at about 2% that would mean we would be looking at mortgages between 6-7% again. Then this week the Fed hinted that it may be soon slowing down on the MBS purchases as well. That could also push interest rates back toward that 7% range.

The takeaway should be this: If you need a refinance get it soon. The signs are pointing to the end of the sub 6% mortgage rate sooner rather than later. Right now a 5.5% rate without points is not difficult. But next week? Nobody knows.

Comments (0) Posted by G.R.A. Admin on Friday, August 28th, 2009


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