Mortgage Rates Should Remain Low

The Federal Reserve Board announced it’s going to buy ½ trillion dollars worth of mortgage backed securities by June of this year, according to the 2 January 09 WSJ. So what?

This means low mortgage rates should continue in the first half of 2009. The Fed will start buying this month. Our government is in effect purchasing all of the mortgages that banks will make to home owners in the next few months.

Why? The Fed thinks it has to; last year investors shunned CMO’s (collateralized mortgage obligations), turning instead to US Gov. Notes, Bills and Bond, which had the effect of destabilizing our mortgage system. The US Treasury has also recently purchased these mortgage backed securities, so far to the tune of $50 billion dollars.

So, it works like this: you get a mortgage issued by your bank. They in-turn, sell the mortgage to Freddie Mae, who bundles your mortgage with others into a CMO. The CMO is then sold to the Fed and other investors.

So far, it’s working. Current mortgage prices are around 5% for a 30 year, and in the high 4% range for a 15 year mortgage.

Our Federal Reserve Building.  Photo by Dan Smith.

Our Federal Reserve Building. Photo by Dan Smith.

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