Monday, January 25, 2010

Changing Federal Government Policies Could Soon Change Mortgage Rates

This morning's Washington Post has a front-page article about the impending drawdown of federal government support for the home mortgage market.

The article, by David Cho, Neil Irwin, and Dina ElBoghdady, is here.

Since the onset of the financial crisis in fall 2008, the federal government has purchased an enormous quantity of mortgage-backed securities: $220 billion by the Treasury Department and $1.25 trillion by the Federal Reserve. The policy stemmed from concern that the lack of private purchasers of the securities would cause skyrocketing mortgage rates and thereby exacerbate the downturn in the housing market.

The policy has had its intended effect, as the average rate for a 30-year fixed-rate mortgage declined from 6 percent in November 2008 to 4.7 percent in November 2009.

Now, though, the federal government has announced that it is likely to end its infusion of cash at the end of March.


Proponents of the de-funding decision applaud it as a necessary removal of the federal government from private markets, but critics warn that it could stop (or reverse) the recovery in the housing market.

Regardless of one's political philosophy, the practical effect of the change in policy is almost certain to be an increase in mortgage rates (barring, of course, a significant renewal of private sector purchases of mortgage-backed securities).

That being the case, owners who want to refinance are well-advised to begin the process now, as there is likely to be a rush of refinancings as more people learn about the change in policy.


Meanwhile, the Post's website has a late-day story (here) that existing home-sales fell by 16.7% from November to December -- the largest month-on-month decline in 40 years. On the other side of the ledger, overall sales of existing homes increased by 4.9% from 2008 to 2009.