Last Wednesday, the Federal Open Market Committee announced that the Federal Reserve would continue to “taper” quantitative easing (QE). The Fed’s stimulus program now calls for $65 billion in total bond purchases per month, including $30 billion in mortgage-backed securities (MBS).
At peak QE, the Fed was purchasing $85 billion in assets monthly.
Mortgage rates slipped lower after the decision. Rates have dropped steadily to begin the year, and are nearing their lowest point in 11 weeks. Forecasters expected that as QE was reduced, mortgage rates would jump, but so far they have dropped. Why?
CNBC’s Diana Olick wrote an article titled “Why Mortgage Rates Aren’t Higher… Yet” that deals with this question. To summarize:
- The Federal Reserve’s QE program put downward pressure on mortgage rates by guaranteeing a large source of demand in the market for mortgage-backed securities (read here for an explanation on how this works).
- Less QE means higher mortgage rates.
- QE has been reduced twice now, and rates are little-changed… even slipping lower in the new year.
- What gives?
Olick interviewed Guy Cecela, editor-in-chief of Inside Mortgage Finance for the article. Cecela made a few interesting points for why rates are behaving the way that they are:
- Investors / markets had already begun to prepare for tapering back in May / June of 2013. Remember those sharp spikes in mortgage rates upon “speculation” about Fed tapering? (See graph).
- The MBS market has shrunk. Mortgage originations are down 52% from a year ago. This means that although the Fed has reduced the quantity of its MBS purchases by $20 billion per month, its overall share of the market is little-changed (or maybe even higher?).
- Investor demand for MBS has increased, which also helps fill the hole left by the Fed’s tapering.
As to point three, news coming from both the U.S. economy and economies around the globe isn’t particularly cheery. China is facing an economic slowdown, and the U.S. continues to take one step back for every two steps forward (see summary below).
In periods of uncertainty, investors tend to look for safer, steadier assets to make a fixed return and protect against volatility. The U.S. bond market is considered a “safe haven”, and increased demand for MBS bonds puts downward pressure on mortgage rates.
Mortgage rates will ultimately rise as tapering continues, but for now the market is still sorting itself out. In the short-term, this opens up a nice window for mortgage finance.
Give us a call at 805.543.LOAN for an honest, confidential assessment of your finance and find out which mortgage program might be right for you.
U.S. economic news:
- Manufacturing activity declined in January. (CNBC)
- Pending home sales declined in December to a two-year low. (Fox Business)
- Strong Q4 U.S. GDP report. (Reuters)
- The January U.S. employment report comes out on Friday. This has the potential to be a significant market mover in the short term. December’s report came in much lower than expected, so investors will be looking for signs of stability in the new year.
Central Coast Mortgage News
Central Coast Lending has expanded its loan program offerings to include a new class of manufactured and mobile home properties. Until now, financing for these types of properties had been unavailable on the California Central Coast and San Luis Obispo County.
With the expansion, we are now the only local lender to offer purchase and refinance loans for manufactured and mobile homes that are “chattel” – that is, homes that are not affixed to the land on which they rest. [Click here for more information.]
The loan program includes finance options for owners that lease their space within a park or a plot of land, but are not owners of the “real property.” Unique opportunities also exist for mobile home units under 400 square feet and “pre-HUD” manufactured homes.
Any questions? We are The Mortgage Experts: ask us anything! Call 805.543.LOAN or email us today to set up a free pre qualification.