Mortgage Bonds And Impact On Mortgage Rates

Mortgage Bonds And Impacts On Mortgage Rates

Gustan Cho Associates

The Federal Reserve Board has recently announced that the Fed has made its decision to slow down and eventually stop buying mortgage bonds and treasury bonds which can have a great impact on the mortgage industry and mortgage rates nationally.  After 7 years of aggressively buying mortgage bonds and treasury bonds, the announcement of the Federal Reserve Board that it is stopping buying mortgage bonds came as a shock and put uncertainty to both mortgage professionals, banking industry experts, and Wall Street as well as economists nationwide. This news was expected for many months and actually for the past year and the stock market was very volatile whenever another rumor was released.

History Of Federal Reserve Board Buying Mortgage Bonds

Right after the Great Recession of 2008 started in October 2008, the Federal Reserve Board released a statement that they were going into the business of buying mortgage bonds to stabilize and stimulate the economy and the market.  The Federal Reserve Board never has done this before and it was the first in Federal Reserve Board history.  Their mission was to manipulate mortgage rates to go down which will encourage homeowners to refinance their home mortgage loans for a lower rate and have excess spending cash for these homeowners where they can spend and spur up the economy.  The driving of mortgage rates down was also to stimulate first time home buyers to purchase new homes due to the low interest rates.  The lowering of mortgage rates was also to get the housing market out of the housing slump and recover from the worst real estate meltdown in United States history.  Real estate values have plummeted to historical lows and never have we had a real estate meltdown like the one we had in 2008.  The housing market did not start recovering until 2011 and it has been recovery of the Great Recession of 2008 has been the slowest recovery of any recession in U.S. History.  Bankruptcy and foreclosure rates have reached historical highs and unemployment rates have sky rocketed to double digits for many years after the 2008 financial disaster.  The mortgage bond purchase program has gone on for almost 7 years since the start of the Great Recession of 2008 and is now coming to an end.  We all knew that the Federal Reserve Board would not go on purchasing mortgage bonds forever and it was good while it lasted.  Millions of home buyers and homeowners have enjoyed historical low mortgage rates for many years and the lowest mortgage rates during these periods have given many first time home buyers to lock in a 30 year fixed rate mortgage loan for as low as 3.0% which has been unheard of prior to 2008.

Why Has The Fed Decided To Stop Buying Mortgage Bonds?

The Federal Reserve Board’s decision to stop buying mortgage bonds is due to the fact that they believe that the economy is doing much better and that the recession is over.  The Federal Reserve Board feels that a slight increase in interest rates is healthy because the unemployment numbers are getting lower every month and unemployment claims are getting lower as well.  However, this is not the case according to many analysts.  Economic experts think that the reason unemployment numbers are low and getting lower every month is because most in the work force has given up looking for jobs or has taken jobs that they are way too overqualified for.  For example, I know many engineers who used to make six figures who have settled for jobs such as car salesman, bartenders, waiters, seasonal workers or other jobs that they are overqualified for.  I know of attorneys who used to make $500,000 per year settling for jobs as insurance agents making a fraction of the money they used to.  However, the Fed think that those folks looking for work are getting them easily and corporate America is hiring aggressively.

How Does The Fed Stop Buying Mortgage Bonds Have Impact Of Mortgage Rate?

The Federal Reserve Board does not directly control mortgage rates, however, the Fed buying mortgage bonds does spiral mortgage rates lower.  Mortgage yields on mortgage bonds are also affected by the political and economic status and impact both nationally and internationally.  Whenever there is major bad news, whether it is the economy or political, bad news drives mortgage rates down.  Once the Federal Reserve Board stops buying mortgage bonds, you can expect that mortgage rates will gradually increase.  Home buyers should not panic.  Most mortgage experts do not see a major sudden spike in mortgage rates.  Even if mortgage rates are expected to increase, most industry experts feel that the mortgage rate increase will be a gradual increase.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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