The Fed’s statement today does not augur well for Santa Clara Mortgage Rates. The Fed said today that it is sticking to it’s plan to end purchases of mortgage securities by the end of March.
The purchases have helped to drive down Santa Clara mortgage interest rates (refer chart below for Mortgage Rates in the last decade. Source – Freddie Mac), providing an important boost to U.S. housing and financial markets. When the Fed stops buying, rates on mortgages could turn higher. According to Fannie Mae chief economist Doug Duncan Mortgage Rates can go up by 30 to 50 basis points if Fed stops buying Mortgage Backed Securities. In fact, immediately after Federal Open Market Committee (FOMC) Statement today, most of the lenders issued a repricing for worse. For a $500,000 an increase in 50 bps in rate means an increase of $155 a month on a Santa Clara county home mortgage payment.
Background - The program to purchase agency mortgage-backed securities (agency MBS) was announced by the Federal Reserve on November 25, 2008. On Wednesday, March 18, the FOMC announced the expansion of the Federal Reserve’s program to purchase agency MBS up to $1.25 trillion by the end of the year. On September 23, 2009, the FOMC announced that the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and gradually slow the pace of these purchases, anticipating they will be executed by the end of the first quarter of 2010.
In its meeting in December, some Fed officials argued the housing market might not be ready for an end to the MBS purchase plan and suggested keeping it in place for a longer period or even expanding it. With Fed now saying the economy had “continued to strengthen” and business spending was “picking up” ; it is trying to gradually pull back from the many programs initiated between 2007 and 2009 to stabilize the financial system and lift the economy.
