Mortgage News

In response to our protracted recession and financial crisis, we have experienced a long period of fiscal stimulus from the Federal Reserve Board. In a typical cycle we focus on the Fed's actions with regard to rates. However, during this cycle their activity has extended far beyond traditional stimulus. Certainly, keeping short term rates near zero for over a year has been very significant. Remember at the beginning of the crisis we were focusing upon subprime loans and the lurking danger of rate increases because of rising adjustables. As most adjustable rate indices moved to less than 1.0%, this threat became secondary to many other issues within the housing sector.

The Fed has supplied hundreds of billions in stimulus to help stabilize the economy. Paramount has been their purchases of Treasuries and mortgage-backed securities (MBS). The Treasury purchase program has winded down and now the Fed says that they are on track to end the MBS purchase program. These actions have been significant in their efforts to keep long-term rates low to facilitate the recovery, especially in the housing sector. Now that the economy has stabilized and it looks like the recovery is beginning, the Fed is returning fiscal policies to normal.

The next action would be an increase in rates and the speculation has started in this regard, despite the fact that the Fed has indicated that rates will remain low for an "extended" period of time. The Fed also has indicated that because the recovery is expected to be fragile, they remain ready to reintroduce fiscal stimulus as needed. The more immediate question is, how much will home loan rates rise when the Fed stops purchasing securities? This will be a good test to see if the financial markets have indeed begun to return to normal...