Feds to buy $500 billion in mortgage backed securities

[Jan 5, 2009.]

 

Mortgage Interest Rates Dropped

Towards the end of November 2008 the Federal Reserve announced they would buy $500 billion in mortgage backed securities and another $100 billion in corporate debt issued by Fannie Mae and Freddie Mac.  When they initially made the announcement, mortgage interest rates dropped quickly and considerably.

Markets Price Ahead of News

As usually happens, when news is announced, the markets react and price that news into their buying and selling plans.  When the market heard the Fed announce it would buy $500 billion in mortgage backed securities, rates immediately dropped.  Although the Feds have not yet purchased the whole $500 billion, the future purchases are already priced into the mix.  As the Feds actually buy the mortgage bonds over the next several months, they ultimately hope to achieve a target of 4.5% for mortgage interest rates.

Feds set a target of 4.5% for mortgage interest rates

When the Feds announced they would buy large amounts of mortgage bonds, their aim was to lower mortgage interest rates.  They have tentatively set a target of 4.5% for mortgage rates by mid 2009.  They have calculated how much they would need to invest into the mortgage bond market to lower the yields to the 4.5% target.  4.5% mortgage interest rates would be a benefit for many homeowners who still need to refinance from adjustable loans or improve cash flow.

Mortgage Applications Increased 112%

According to the Mortgage Bankers Association, mortgage applications increased on the news that the Feds were going to buy $500 billion in mortgage backed securities and try to drive the mortgage rates down to 4.5% by mid 2009, mortgage loan applications increased 112%

Now is a good time to refinance

Refinances are up 203%.  Now is a good time to refinance.  If you have equity in your home, or are able to pay down the principal balance you owe, you can take advantage of lower mortgage interest rates.  Lower mortgage interest rates means lower monthly payments and save on mortgage interest over the life of the loan. Most refinance loans require a minimum credit score and income documentation. 

Not for troubled borrowers

The Feds announcement to buy $500 billion in mortgage backed securities is not necessarily aimed at helping troubled homeowners.  Refinancing a mortgage requires a minimum credit score and maximum debt to income qualifying ratios.  

Written by Tiffini Anderson, CMPS for PrimeLending in Reno, NV

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.