The Final Countdown
30 year fixed mortgage rates have been artificially too low for some time. This is due to three major factors: The purchasing of Fannie Mae and Freddie Mac mortgage backed securities by the Federal Reserve, the U.S. recession, and global instability in the financial markets. The Federal Reserve is near the end of their $1.25 trillion dollar purchase program of Agency mortgage backed securities. This program will officially end in just 25 business days. They have been slowing down their weekly purchases from $20 billion to $11 billion as they stretch out their remaining funds until the end of March. When this purchase program is done it will remove the single largest weekly purchaser of mortgage backed securities in the market. This removes the artificial demand for a financial product that 12 months ago no one would buy. Since all of our mortgage rates come from the sale of mortgage backed securities, this will push mortgage rates higher. The second reason why rates have been artificially to low has been the weakness of the U.S. economy. Mortgage rates are extremely sensitive to inflation. And there can be no inflation when the economy is shrinking. However, growth naturally leads to inflation in some measure. The 4th quarter of 2009 grew by 5.9% as measured by our GDP. As our economy continues to recover and grow, it will put pressure on mortgage rates. The third reason, global instability, will continue for some time and will still provide some level of support for mortgage backed securities. A good example of this is the recent concern of Greece defaulting on their sovereign debt. Concern over this and the domino affect in the European Union has helped to make our Treasuries and mortgage backed securities attractive to foreign investors as a safe-haven. There is no question that mortgage rates will rise by the end of March. However, this is not necessarily a bad thing.