This is a guest post by Tim Manni of HSH.com. Tim is the author of HSH’s daily blog, which concentrates on the latest developments in the mortgage and housing markets. If you like what you see here, please consider subscribing to his RSS feed.
Are you at all concerned about where mortgage rates are headed as we roll into 2010? If so, it’s understandable since many analysts have predicted rates to rise as the year goes on.
While there’s still some uncertainty surrounding the future direction of mortgage rates, it’s safe to assume that rates will rise in the absence of the Fed’s mortgage-backed securities (MBS) purchase program. As evidenced by the statement from the very latest Federal Open Market Committee Meeting (FOMC), the Federal Reserve maintains that their purchase program will expire at the end of the first quarter.
A quick history lesson
As a strategy to lower conforming fixed rate mortgages and to promote stability in the housing market, the Fed announced a program on November 25, 2008 that was designed to purchase $500 billion in Fannie Mae and Freddie Mac MBS. By early 2009, the Federal Reserve decided to purchase an additional $750 billion in MBS in order to keep mortgage rates low.
The Fed’s influence on rates
By March 31, 2010, the Fed will have spent $1.25 trillion to keep conforming rates at or near historic lows. By our reckoning, the Fed’s involvement in the mortgage market brought conforming fixed-rates down perhaps 0.75% below where they would be absent the program. This means that we expect interest rates to rise somewhat when the program concludes.
By how much rates will actually rise will depend on whether or not private investors will be in a position to buy these investments. How strong that private demand will be is still uncertain at this time. It’s best to plan for at least some increases in interest rates as the end of the Fed’s program approaches, and for some period after the March 31 deadline.
While some analysts expect an immediate increase of up to a full percentage point in rates when the Fed decides to stop buying agency MBS, we’re not among them. We think that any rise in rates would be accompanied by a reduced demand for mortgages, which in turn would serve to somewhat temper any upward rise in rates.
Here’s why: The Fed’s purchases are serving to help keep rates low by absorbing MBS supply that the private market cannot or will not buy. When the Fed exits, the additional supply might overwhelm remaining demand, causing a rise in interest rates. That rise in rates would strongly curtail refinancing (and possibly some homebuying) activity, limiting the amount of new MBS supply the private market will need to absorb. This falloff in new MBS supply means that rates might not rise as much as some fear, since the private market may be able to more easily digest it.
Back to “Normal”
During 2010, the mortgage market will transition from almost-fully-government-supported to one once again driven by the private market to a much greater degree. As markets return to “normal,” so too will mortgage rates, which, for the early portion of 2010, should still remain among the best seen during the past 50 years. However, barring a double dip to the recession, borrowers should have no expectations that rates will remain at multi-generation lows throughout the year.
Broadly, we expect 30-year fixed-rate mortgages to hang around the 5% mark during the first quarter of 2010, as support programs (MBS purchases and the homebuyer tax credit) remain fully in force. After that we’ll start the transitional period described above and, for planning purposes, borrowers should expect rates to rise one-half to even a full percentage point higher than where they are now.
Rates for the rest of the year are likely to be more economy- and inflation-dependent. With continued economic healing expected, pressure will build for the Fed to raise their Federal Funds rate and remove certain supports like the TALF and the TSLF. Absent any resumption of these programs, rates will nudge closer to 6% than 5% for the final two quarters of 2010.
Will yesterday’s failed loans continue to distort the market? Will Fannie Mae and Freddie Mac’s evolution cause rates to rise or fall? Will lending standards ever ease? You can get the answers to these questions and more by consulting HSH.com’s “2010 Outlook for Mortgage Rates and the Mortgage Market.”