Fed Action Means Lower Mortgage Rates are on the Way

Rusty MacLachlanYesterday, the Federal Reserve announced some very aggressive steps aimed at unlocking the sluggish credit markets, with a major focus on further lowering mortgage interest rates. The Fed said it would significantly expand its ongoing program of buying Fannie Mae and Freddie Mac mortgage-backed securities (MBS) and debt. The Fed increased its planned MBS purchases by $750 billion, making the new target $1.25 trillion, and doubled its slated debt purchases to $200 billion. In addition, the Fed announced a new program to buy up to $300 billion in long-term Treasury bonds over the next six months. These initiatives are just the thing NAHB has pushed for in our recent meetings with Federal Reserve officials and should send a strong signal to consumers that homes can be purchased on very favorable terms.

Mortgage rates should drop significantly in response to the Fed moves. Some lenders have already lowered posted rates by a quarter of a point. This should be encouraging news for potential home buyers who have been sitting on the fence, waiting for the right reason to get back in the market.
Some dealers have indicated that the 10-year Treasury rate could test the December lows of just over 2%. It is anticipated that the majority of the Fed’s Treasury purchases will be centered on the 5-10 year sector, which will have the most influence on mortgage rates. The immediate result was a widening of MBS spreads as Treasury yields collapsed on the announcement of the new Fed Treasury purchase program. This presents an opportunity, however, for the Fed to methodically drive down this spread, as they proceed in acquiring the enormous volumes of Fannie and Freddie MBS and debt as outlined in the March 18 announcement.

If you have any questions, please feel free to contact Dave Ledford on the NAHB staff.

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