March 6, 2010

Expect Interest Rates To Rise

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The Federal Reserve yesterday plans to remove its support from the financial marketplace. The Fed purchased $300 billion of Treasury securities and currently anticipates another $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. In other words, the Fed plans a soft exit and is on schedule to complete the program end of March. The expectation is that investors are now ready to step in and fill the vacuum and the markets will begin a return to normalcy.

You can take the view that this is a nod towards the ability of the economy to lift itself. But the timing of this move has increased nervousness for housing. The Fed will be exiting the mortgage market just time for the spring/summer home buying season. So the question is how much will rates rise to accommodate new investors for the risk of buying mortgages that have lots of uncertainty built in. After all, job loss is still on the decline and shot sales, foreclosures and a lot of pain will have to be reflected in the price for investors to step up. Eveyones understandably nervous.

The Fed's asset purchases kept rates artificially low. They replaced the banks and insurance comppanies as well as sovereign nation funds and others. These private investors are a little spooked. Yes, they will buy, but they will be looking for deals and higher rates to compensate for the risk. This will certainly force mortgage rates higher.

The Mortgage Bankers Association notes: The Fed remains unlikely to raise rates anytime soon. However, they have clearly indicated that they are going to end their MBS purchase program, as well as ending a number of other liquidity facilities begun during the financial crisis. Yields on mortgage securities will need to increase to get private investors back into the market once the Fed stops its purchases.

1. We expect that mortgage rates will rise by about a percentage point by the end of the year, to a little over 6 percent, primarily as a result of the Fed ending their purchases.
2. Mortgage originations will fall to $1.3 trillion in 2010 from an estimated $2.1 trillion in 2009.
3. Purchase originations will be essentially flat at $745 billion, as home prices stabilize, and home sales increase.
4. Refinance originations will fall by more than 60 percent to $529 billion as mortgage rates rise through the year.(Via the MBAA)

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