The Fed Acts to Push Mortgage Rates Lower

by Alex Stenback on November 25, 2008

In it's first action to directly influence mortgage rates and the housing market, the Federal Reserve has announced that they "will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae."

There's more:

This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

This action is aimed directly at, and intended to narrow, the interest rate "spreads" between Mortgage related securities and treasury securities, which have been leaking wider ever since the Fed stopped short of affirming a "full faith and credit guarantee" for Fannie and Freddie's obligations.

If you read our post last week on why mortgage rates are higher than they should be, you'll have some great context as to why the Fed had to do this.

Prices of mortgage backed securities are sharply higher on this news.  Expect mortgage rates to see .25 in improvement immediately, (putting them in the sub 5.5% range for 30 year fixed paper) with further gains possible as the market sorts out the impact of this action.

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