January 29th, 2010 4:36 PM by Richard T. Cirelli
The Importance of Yesterday's Fed Announcement
Yesterday the Fed announced that they will leave interest rates unchanged for the foreseeable future so mortgage rates should stay low, right? WRONG! How's that?
The Fed said they still plan to discontinue their program of buying Mortgage-Backed Securities by March 31st. It is this plan, and nothing else, that is keeping mortgages rates artificially low by about 1%. In other words, if the Government stops buying MBS's at 4.5% - 5.%, then rates will rise to a rate that other investors will want to obtain if they are to buy MBS's instead of much safer Treasury Notes and Bills. We know from experience that investors in MBS's want a rate about 1.5% higher than 10-Year Treasury rates. Since Treasury Rates will rise along with the Fed Funds Rates, mortgae rates will rise too.
To illustrate the immediate impact on the Fed's statement yesterday, the Fed announcement was released at exactly 11:15 and within seconds MBS bond prices immediately nose-dived. And since rates move in the opposite direction of price, rates went up proportionately.
It is important to note the speed at which the market reacts to the news. Fortunately in this case, the professional MBS's traders anticipated the Fed Announcement not to continue the MBS purchase plan so although yesterday's rise seemed dramatic, the actually impact on rates is less than 1/8%. But it is most likely the beginning of an upward trend in rates.
If it was me, I wouldn't hesitate to lock in at today's rates. The impetus for higher rates in the near future is much greater than the hope for lower rates.
I track the movement of MBS prices and rates every day, all day long, to try to obtain the best moment in time to lock my clients in. Most lenders and loan officers take your application, lock it in and move on. I always strive to get the best for my clients.
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