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Fed: The king of mortgages

By Polyana da Costa ·
Thursday, September 13, 2012
Posted: 5 pm ET

The Fed wants to keep mortgage rates low and it seems ready to do whatever it takes to accomplish its goal, including printing billions of dollars to become the king of mortgages.

The Fed said on Thursday that it will spend $40 billion per month to buy mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Yes, this is the long awaited QE3. But unlike with the two previous versions of bond-buying programs -- QE1 and QE2 -- the Fed didn't say when the buying spree will end. It says it will buy mortgages until it's time to stop.

The central bank already owns about $843 billion in mortgage-backed securities and it says will continue to reinvest any maturing mortgage bonds. Through reinvestment and new purchases, the Fed will increase its longer-term securities by $85 billion per month. Most of that money will go toward the purchase of mortgages.

What does this mean for mortgage rates?

The Fed's latest act of desperation should, in theory, keep mortgage rates low. But will it?

When the Fed announced QE2 in November 2010, rates spiked unexpectedly. When the Fed ended the $600 billion bond-buying program in mid-2011, rates tumbled.

So far, so good

It's been a few hours since the Fed hit the panic button and the required net yield on Freddie Mac bonds tumbled to 2.41 percent from 2.62 percent. This is the lowest the Freddie yield has reached since Bankrate started tracking rates in 1985. Normally, mortgage rates follow the direction of mortgage bonds. That means you should expect to see some of the lowest mortgage rates in history in coming days. Yes, lower than all the record lows you've seen so far.

But remember, rates don't always follow logic.

Before refinancers celebrate, here is a warning: There is a risk that rates will increase slightly in the short term because of the dose of optimism the Fed injected into the markets, says Paul Edelstein, director of financial economics at HIS Global Insight.

"As money flows from bonds into stock, I can see how rates may increase" in the short-term, Edelstein says. But over time, the Fed will accomplish its goal and rates will stay low, he says.

So let's start the bets.

How low do you think rates will go?

Follow me on Twitter @Polyanad.

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October 22, 2012 at 11:29 am

It sounds like caioslidotnng at 6.25 for 30 years will be the best deal to me lowest interest rate, your caioslidotnng both loans without PMI, right? Sounds like a good way to go. I might suggest ignoring the term of the loan and telling the bank you want to make your monthly payment the same as it currently is. It seems like you'd be cutting your rate on both loans with a rate of 6.25, right? so paying the same amount monthly may allow you to pay your entire mortgage off in fewer years. That seems like the best route to me!

September 19, 2012 at 6:17 am


Is what you are writing about an actual program or a proposal?

September 18, 2012 at 4:05 pm

I know the feeling bum. a year ago I paid for a 30 year at 3.65%, since rates could never go lower.

- Never say never. I'm currently looking at some refinancing options.

September 14, 2012 at 11:41 am

100% Financing with Principal Reduction
The new loan will pay off all existing liens on the property including late payments and lender fees. At closing, the principal balance of the new loan will be reduced to the current appraised value of the property.

3% Fixed Interest Rate with 40 or 50 Year Term
All loans under the Home Flexible program will include 3% fixed interest rates with 40 or 50 year amortization. Because mortgage brokers have no option to sell at a higher rate, a 5% Origination Fee will be paid by the program on all loans. The 5% fee will be based on the pay off amount before principal reduction. No other broker fees or YSP will be allowed.

Flexible Underwriting
The program will include several special underwriting guidelines to help borrowers in these difficult economic times including:
• Credit Score Flexibility: Credit issues caused by the economy will be ignored. Late payments on previous mortgages, bankruptcy in the past 12 months and late payments on autos or credit cards during the past 180 days may be removed from credit reports. Credit scores will be recalculated without these items and the new score must be greater than 520 for program eligibility.

The solution to resolve the problem of the modification is to approve FHA to acting as a lender to refinance all the mortgages that are deliguent. At the same time the goverment is going to create thousands of new positions truth the country. Fha can use the stimulus for cover the reduction on the mortgage. I know how can we do it. These can be the answer to stop the bank going out of business. I can't understand why the FDIC can give a big reduction on the acguisitions of the mortgages to investors and not to the homeowners when the bank closed. Yes we can….

September 14, 2012 at 10:40 am

I sure hope rates keep dropping into December. I'm getting a house built right now, and I can't lock in until I know generally when my closing date will be!!!!

September 14, 2012 at 10:17 am

Darn! And I just Refi'd last month. I wonder if it'll got below 3% or even down to 2.5?