The Federal Reserve Has a Plan to Keep Interest Rates Low ... PART 1

So how low will they go? I know ... you’re numb when you hear another Billion, Trillion or Gazillion (just kidding) will be spent to turn our housing market around. The Federal Reserve announced on Wednesday they will be buying an additional $750 billion in Mortgage Backed Securities (MBS) in an effort to keep mortgage rates low and make home buying and refinancing affordable for more consumers.

Here’s a quick mortgage 101 lesson. After a home mortgage is created, it is packaged into a pool with other mortgages and sold to investors in the form of Mortgage Backed Securities (MBS). With so many mortgages defaulting over the past couple years, the appetite of investors to purchase mortgage securities has been weak causing less money available to fund new mortgages. This resulted in home loans rates going as high as 6.75% during 2008.

Coming to the rescue in January, the Fed began buying MBS every day creating a market and causing interest rates to drop initially to the high 4's before settling in a range between 5.00% and 5.50% for a 30 year conforming loan. The plan to purchase $500 Billion worth of securities would last through about June. With Wednesday’s announcement of another $750 Billion commitment, the Fed's buying is expected to last thoughout the rest of this year. We can expect mortgage rates to continue near current levels or slightly better during this time.

But wait ... there's more to the story. The media is reporting interest rates could get below 4.00%. That’s not likely to happen and there are good reasons why. The story continues in my next post - Part II; False Illusions and What You Need to Know.