Mortgage rates expected to slide with Fed's new moves

Home loan rates should fall further with the Federal Reserve's latest moves to pull down long-term interest rates -- offering new hope to home buyers and to homeowners looking to refinance.

But how much lower loan rates might drop is a matter of debate on Wall Street. Although the Fed directly controls short-term interest rates, it merely influences long-term rates.

Some experts see mortgage rates tumbling another half-percentage-point in the next few weeks. Others see a smaller decline. Any move lower would be the right direction for the housing market, of course.

The Fed said today it would take two big steps to boost its influence over long-term rates: It will expand its purchases of mortgage-backed bonds to $1.25 trillion from its current commitment of $500 billion, and it also will buy $300 billion of longer-term Treasury securities.

The idea, with both programs, is to try to push up the market value of mortgage bonds and Treasuries, which in turn would pull down interest rates on the securities.

The Fed began buying mortgage bonds at the start of this year, and is credited with helping to keep downward pressure on loan rates. The average 30-year mortgage rate was 4.89% last week, compared with 6.5% last fall, according to the Mortgage Bankers Assn.

Direct purchases of Treasuries would add more firepower to the Fed’s efforts on interest rates, because Treasury bond yields are benchmarks for other long-term rates, such as on mortgages and corporate bonds.

The Fed’s announcement today had the desired effect: The 10-year Treasury note yield plunged to 2.53% from 3% on Tuesday. Treasury yields had been edging higher in recent weeks, but the Fed put the kibosh on that trend.

Ethan Harris, an economist at Barclays Capital in New York, said his firm figures that the Fed’s new commitment to damping long-term rates could bring mortgage rates down about a half-percentage-point in the next few weeks or so. That could mean rates below 4.5%.

Some mortgage brokers were already quoting rates in the 4.5% to 4.75% range today, not including upfront fees, or points, on the loans. . . .

Still, the Fed can only succeed in keeping rates down if private investors are willing to buy mortgage and Treasury securities at the same yields the central bank is willing to accept.

"The risk in driving down [Treasury] yields is that investors might still choose not to buy riskier assets," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "We simply don’t know how this will play out, because there is no prior experience to use as a route map."

If investors worry that the Fed’s unprecedented efforts to pump money into the economy will mean a surge in inflation in 2010 or 2011, they may be reluctant to lock in much lower interest rates on fixed-income securities.

Keith Gumbinger, vice president at mortgage research firm HSH Associates in Pompton Plains, N.J., noted that although mortgage rates have historically shadowed moves in 10-year T-note yields, that relationship has become "fractured" in recent months. Mortgage rates have declined year-to-date even though Treasury yields have rebounded from record lows in December.

Even so, he is encouraged by the Fed’s commitment to extend mortgage-bond purchases, Gumbinger said. He figures mortgage rates could be down about a quarter of a percentage point in the next few weeks thanks to the Fed’s announcement.

But he warned that another wave of refinancing activity could vex homeowners who are trying to get through to banks or mortgage brokers. The severe shrinkage of the mortgage industry over the last two years has left the business short of capacity to handle a crush of loan requests.

"We are probably going to run into that repeatedly" if loan rates keep dropping, Gumbinger said.

-- Tom Petruno

Comments

[Josh Ooi]

We are too late for this to work. The problem is not the mortgage rate today but the ability of the people to get mortgages. Jobs loss today has hit the middle class and there is more to come. Would the bank provide the loans to a person whose jobs may not even be there next month? Would the bank refinance people who are self employed? That is the questions. These rates would only benefit the rich. We should have nationalize Fannie Mae and Mac when the government took over and use it to provide a 40 years 4% loan to all tax payers to refinance all their high interest loans. This would have force all banks to lower their mortgages down. This would have been a more effective than doing this right now.

[Bill McGowan]

Mortgage loan security or the real estate itself, plus the ability to repay the mortgage, and the borrowers credit worthiness are still the required
elements in the equation. A good starting place to help get back on track, would be to revisit the credit scoring mystery. It's still a crap shoot. Our interest rates are still tied to our scores, which are clearly being manipulated by the lenders to minimize risk. That's a wise business decision, but this time around, they are using our public bail out money to play the same game that sank them in the first place.
Does anybody out there know who owns these three powerful credit reporting companies. They are the real weapons of mass destruction. More oversight and accountability is needed in that direction now !
Remember, a credit report is the first thing ever requested in the loan process.

[Amar Ket]

Just imagine what Bernie Madoff could have done if he had the ability to actually print money..and now you should notice it is exactly what is going on.

Bernie Madoff for Treasury Secretary!

[mr.bilko]

Mortgage interest rates will go lower, for those people who come up with +25% down payment or equity. For those making the minimum 5% down, 20% down on a non-conforming loan, do not expect to get the lower rates because you will not qualify.