America's mortgage rates are ready to slide down to 4.5%, fueled by the confirmation of the rumor about the Fed's intervention into mortgage-backed securities markets:
The Federal Reserve on Tuesday announced that it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS) and that it has selected private investment managers to act as its agents in implementing the program.
Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.
Sean Purcell and I talked about this breaking news on Radio Mortgage today. Here, I talk about the cost of "free market", non-government supported mortgage capital is over 8%. Yesterday, I detailed why it is absolutely NUTS not to jump on this bailout immediately; I believe that the fear of inflation will whipsaw the mortgage markets in the not-too-distant future.
Is this action inflationary? Well, the Press Release would suggest that it isn't:
Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve's exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.
I don't get it. Sure, if the government can borrow money at 2.5%, and lend it at 4.5%, it sounds like a zero-sum game. However...not all mortgages are paid so their is the risk of default. So while the government is borrowing money to lend money, it isn't a perfectly hedged arbitrage play; that's why Wall Street could eventually see this as inflationary, and start selling mortgage-backed securities. That could drive mortgage rates towards the "free market" mortgage rates of 8%.
Wait, that's not all. Where will the government get the money to but the mortgages?
Purchases will be financed through the creation of additional bank reserves.
Oh NOOOO! The government is printing money again...that's inflationary!
This is perhaps the greatest "bailout" you'll ever see in your lifetime. If you're a well-heeled borrower (plenty of equity, documented income, and excellent credit, you can get a mortgage rate in the 4's BUT...
...you have to act quickly. Contact me as soon as possible.
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Brian... it will be very interesting in the next 2 months. I already have another loan officer that I am competing with who is giving a client of mine a 5% rate with zero points and $900's in fees on a $295,000 mortgage. This person is already preparing for low rates. If it didn't happen, the borrower would just get what is out there. Nobody is going to do business at a loss.
In any case, I think that we would be on the same page on this, that you bring up some great points.. Where are we getting the money to do this? Yes, very inflationary. I wrote about inflation vs deflation a month ago. People are like this is going to be great, but this could hurt us in the long run. I am not willing to sacrifice my future.... are you? Happy New Year..