For more than a year the Fed has been buying up billions of dollars worth of mortgage backed securities. Essentially that means that when banks lend money on mortgages they have been able to bundle those mortgages and sell them on the market (mostly to the Fed) and thus free up funds to offer more mortgages. Well the Fed is officially out of the market of buying these mortgage-backed securities (MBS’s) as of today. As a result banks will have fewer buyers of the loans on their books and thus they might have less money available to lend. The end result is expected to be that mortgage rates will be heading up. The big question now is how much will rates change? We shall soon find out but many analysts are expecting rates to only jump about a 0.25%
Here are some excerpts from a recent Business Week article on the topic:
Yields on Fannie Mae and Freddie Mac mortgage securities jumped by the most relative to benchmark rates in five weeks as the Federal Reserve’s unprecedented buying of housing debt drew to a close today.
Spreads on agency mortgage bonds will widen “a bit†and become more volatile after the end of the Fed’s daily purchases, though they probably won’t expand more than 0.2 percentage point, Curtis Arledge, chief investment officer of fixed income at New York-based BlackRock Inc., said today in an interview with Bloomberg Television.
“It’s been one of the more telegraphed changes we’ve seen in a long time,†said Arledge, who oversees about $590 billion at the world’s largest money manager. “The marketplace has positioned itself for the Fed to be absent.â€