By The Federal Reserve Board may be the least understood institution in America and about which people know the least. But in these trying times, their role has not only been big. It’s been critical. The Fed has probably done more to get the economy moving again than all the government spending and bailout programs combined.
About 85% of all mortgages made today are being put into mortgage backed securities. These securities are being created primary by Fannie Mae and Freddie Mac. Both of which are now 80% owned by the government. In past, these securities were bought by banks, mutual funds, insurance companies and pension funds. These same investors are still buying, but in general, they are buying a whole lot less than they did before the credit crunch of 2008-09.
In order to drive rates lower, the Fed has stepped in and been buying massive amounts of mortgage securities. As a matter of simple supply and demand, massive buying will drive bond prices up, and as bonds prices rise, rates drop. Thus, the Fed made a conscious decision to buy mortgage securities to drive mortgages rates downward, largely to keep pressure off the American homebuyers and to stimulate housing markets in general.
The Fed has stepped in as the buyer of last resort, and they are now authorized to buy up to $1.2 trillion in these MBS’s. They’ve already bought $975 billion, with $225 billion more to be bought.
They have been buying at a rate of $25 billion a week; just enough to keep rates relatively low, allowing people to refinance at lower rates and for homebuyers to afford new homes.
Did rates moving up over the last couple of weeks make your heart stop? Fear not, Uncle Sam is on the job. In fact the current U.S. mortgage market feels a lot like the diamond industry.
The reason why is pretty apparent. Although the stimulus package will put lots of dollars to work, there’s nothing quite like millions of homeowners having $300-400 extra every month because they refinanced into a lower rate. There’s nothing like these lower payments to help families to pay their bills easier or to have a few extra dollars they can spend. Also, with home affordability at an all time high buyers are back IN THE MARKET.
Who moved my cheese is the title of a great little book that deals with change. If you have you haven’t read it, I highly recommend you get your hands on a copy. It’s a simple story about surviving change and in this market, change is the one constant in the universe.
After several decades in the mortgage industry, there is very little that gets me excited. I’ve learned that staying calm can often be the most effective way to handle things.