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The Federal Reserve Makes Important Announcement The Federal Reserve made a very important announcement a few days ago that should be in the news today. In their Announcement, which can be accessed by the link below, the Fed plans to become involved in the purchase of Mortgage Backed Securities (MBS) during the 1st and 2nd Quarters of 2009. Their goal is to continue to add stability to the Mortgage Bond Markets. This follows the "rumor whispered out the back door" a few weeks ago. The Announcement indicates that up to $500b may be used in this effort While the Fed does not "set" Mortgage Rates, they can be an influential participant in the markets by adding liquidity as needed. Their early announcement of a 4.5% rate was amended to outline a process whereby they would use their capacities to enter the market during situations where the markets are selling off. A sell off would generally move rates higher. Rather than dumping massive amounts of capital into the markets at once, the Fed announced a "better" plan on December 16, 2008 whereby they would not dump cash into the markets early, rather add influence in the form of purchases of MBS on an as needed basis. This action, as outlined in the announcement and frequently asked questions, applies only to Fannie Mae, Freddie Mac, and Ginnie Mae Securities. The likely outcome of this move is to maintain stability in the markets, and may perhaps, bring lower rates. Keep in mind that the Fed has announced an effort to "maintain stability in the financial markets in hopes of fostering improved conditions more generally." With this, they are not promising "lower rates" as they realized after the rumor of 4.5% rates; they have no such ability to control mortgage rates. The Federal Government got out of the Mortgage Rate Setting business in 1984 when then President Reagan streamlined the operations of the Federal Housing Administration giving control over rate setting to the financial markets. We continue to see HUGE volatility in the rate markets. We have had 2 circumstances in the since December 17 where rates have dropped below 5% for 30 year fixed rate mortgages. In both cases, the improvements seen on those days vanished in less than 3 hours and rates increased by nearly .25% to moved back above 5%. The point here is that it tough to pick the bottom. I recommend to your clients who are looking for lower rates, in either their purchase or a refinance, to set a parameter of a low end rate where they will be satisfied and instruct their Lenders to lock that rate in when it is available. I can't tell you how many of my clients are still sitting at rates north of 6% while they hope that rates will get lower. 30 Year Fixed Mortgage Rates hit 5.25% in January, 5.75% in June. In both cases, the 10 Year Treasury Bond hit a low around 3.34%. This week, that 10 Year Treasury Bond hit 2.05% and we barely broke 5%. The appetite of investors for MBS has been waning as a result of the horrors of the mortgage loans made in the preceding 3 years. The bottom line here is that "pigs get fat, hogs get slaughtered, and some people just keep paying higher rates as they have ignored the opportunity to benefit from lower rates on more than one occasion in 2008. Perhaps this move by the Fed, along with moves already approved and announced by Treasury will have the impact of closing the spread between mortgage bond investments and other such investments. The Treasury has put little in motion thus far. It is said that of $300b that they committed, less than $20b has been disbursed.
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