My Mind on Mortgages

This is an article I wrote last week and will appear in an upcoming newsletter to my past clients:

On November 25, 2008, the Federal Reserve surprised the financial markets by announcing that it would include agency-issued mortgage-backed bonds (MBSs) in what has since become a $1.25 trillion open market operation known as Term Asset-Backed Securities Loan Facility or TALF. The goal is to improve conditions in the housing and financial markets.

Mortgage rates are inversely related to the price of MBSs. As the price of MBSs rises, mortgage rates decrease and vice-versa. The Fed’s objective in its commitment to purchase $1.25 trillion of MBSs was to create substantial demand; raising MBS prices and essentially subsidizing mortgage rates.

The results of the Fed’s plan are substantial when you evaluate mortgage rates over the past three years. From August 2006 through Novermber 2008, average 30-year fixed mortgage rates ranged from 5.875% to 6.625%. Since the announcement and active participation in the open market for MBSs, 30-year fixed mortgage rates have averaged between 4.625% and 5.50%.

Millions of homeowners have managed to take advantage of the Fed’s subsidy by refinancing their existing mortgages. Furthermore, thousands of homebuyers have been able to buy real estate at depressed prices with historically low mortgage rates.

But all good things must come to an end. As of August 2009, the Fed had used $766 billion of the $1.25 trillion slated for the program and announced that it would wind down this special program by the end of the year March 2010.

Even before the Fed officially discontinues its open market operations for MBSs we expect mortgage rates to rise in anticipation of their departure from the open market. It’s difficult to know exactly how much this will affect mortgage rates, but many analysts are predicting a 1% increase to fixed mortgage rates by the end of the year.

I realize that many homeowners refinanced in the first six months of 2009. Many others would like to refinance but can’t because of lower property values and/or tighter underwriting guidelines. However, there are many homeowners who have yet to contact us regarding refinancing information.

If you’ve thought about it but haven’t gotten around to calling, I would highly encourage you to do so soon. It costs you nothing to contact our office and at least discuss your situation. It costs you nothing to have us evaluate your situation and get back to you with options for your review. It costs you nothing to evaluate the information we provide.

However, once rates increase, as they are expected to do, it could cost you hundreds and even thousands of dollars over the life of your loan to not take advantage of the current level of mortgage rates.