A little talked about shift in a Federal Reserve policy could have a negative effect on interest rates in the spring of 2010. For the past year the Federal Reserve’s aggressive $1.25-trillion purchase program of mortgage-backed securities has artificially pushed interest rates down. Without this government purchase initiative, mortgages would have to float on the open market, which many economists predict would have at least a 1% increase from their current levels. And the Federal Reserve has indicated that it intends to wind down its purchase program by the end of the first quarter of 2010. Many consider the Feds exit from this market the biggest risk for banks and the housing market for the next six months. Historically 30-year conforming loans level off at about .25% below Jumbo mortgages, which are currently just under 6.0%. With 30-year conforming loans just under 5.0%, this would indicate a correction will be forthcoming when this buying spree finishes up, of .75% to 1.0%, bring 30-year conforming rates to around 6.0%. This represents about a 10% reduction in the buyer purchasing power. Another risk factor for interest rates are the ongoing deficit spending the government is involved with and paying for existing debt; the pressure on the dollar and a likely improvement in the economy forcing inflation up, this is an ideal time to lock a loan for purchase or refinancing.
Tags: federal reserve, interest rates, locking a loan, timing the market
