News

04/07/2009 - US Government Announces Plan to bring down Mortgage Rates

In late March the Federal Reserve announced that they would be buying up to $300 billion in bonds, and $750 billion in securities backed by residential mortgages, this is in addition to the $500 billion they have already pledged to purchase. Thus bringing the total to $1.25 trillion of mortgage backed securities purchased by the US Government. 

These purchases will drive up the price of these bonds - and this will drop the yield or effective interest rate on both bonds and mortgage backed securities.  (See this article on Bond Prices vs Bond Yields for more information)

When the government originally pledged to purchase $500 billion in these mortgage backed securities, the average rate on a 30 year mortgage dropped by almost a full percentage point. Since the second pledge, we have seen rates continue to drop. 

Before the mortgage crisis of 2008, the average rate spread between the comparable treasury rate and the 30 year mortgage, was between 1.25% - 1.50%.  This was the normal spread, as it's a bit more risky to invest in mortgages as opposed to the very safe US Treasury Bonds.  More risk = higher rate of return for investors.

At the start of this year, that differential had increased to over 2.50%. Since the Fed has started the process of buying mortgage backed securities that differential has dropped to less than 2.00%.

So, even though the yields on treasuries have been rising in recent weeks mortgage rates have actually been dropping. We will likely soon reach an equilibrium between treasuries and mortgage rates when this happens treasury rates and mortgage rates will likely move in unison with the spreads closer to their historical averages.

The economy is finally starting to show some signs of life, and in order to pay for all of the stimulus programs (including buying Mortgage Backed Securities) the government is being forced to issue new debt and print more. Steps like these and an improving economy may cause inflation in the future, which would then means higher treasury rates and higher mortgage rates.

Now is the time to take advantage of these historic rates as all signs point to higher rates later this year.
 
We suggest putting your application in progress now by applying online, you can either lock your rate now, or float as you we get closer to closing when rates drop.  Consider signing up for our Rate Watch - which can email our rates to you when you choose.  Or ask us to provide a custom rate quote for your situation.

Or you can always call us toll-free at 877.523.3886 and ask to speak with a loan specialist.