Industry News
Mortgage Industry News
New Fed Programs Help Mortgage Rates
09/23/2011
This week, the Fed announced new measures to boost the economy. Expectations are low for much economic growth to result from the measures, but they did help push mortgage rates to historic lows.
The Fed released its statement Wednesday afternoon, and MBS markets then staged a very strong rally for several reasons. First, quite simply, the Fed confirmed that there are "significant downside risks" to the US economic outlook. Slower economic growth reduces inflationary pressures, which is favorable for mortgage rates. Second, the Fed announced the widely expected Operation Twist program. This program will extend the average maturity of the Fed’s portfolio by purchasing $400 billion of longer-term Treasury securities and selling an equal amount of shorter-term Treasuries. The third major element from the statement helping mortgage rates was a surprise to most investors. The Fed will begin to reinvest principal payments from its mortgage-backed securities (MBS) holdings in additional agency MBS. Until now, the Fed has been reinvesting the MBS principal payments in Treasury securities.
With roughly $885 billion in MBS holdings in the Fed’s portfolio, these principal payments, along with Operation Twist, will create a significant source of additional demand for MBS. The impact of the announcement was priced in very quickly. Although the Fed has not yet begun to purchase securities under the new programs, investors have already factored in the expected impact of the added demand on MBS prices. Following prior Fed announcements about purchasing MBS, nearly all of the benefit took place right away.
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