Graphic via Wall Street Journal
From the Fed Statement yesterday:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.
As mentioned yesterday, the program to purchase mortgage-backed securities was originally intended to end in December. So while the Fed is not expanding the program, they are extending the timeline to avoid a cliff effect – a rapid rise in rates caused by an abrubt end to the buying.
Though this is no doubt good news for those in the market for a mortgage, don’t assume rates will automatically stay low until the end of the first quarter.
To see what I mean, take a look at the graphic above from The Wall Street Journal that shows just how much money the Fed has put to work (approaching $900 Billion dollars) and it’s impact in driving rates lower.
The graphic also clearly illustrates an a key point - mortgage rates have not moved in lock-step with Fed purchases. So keep in mind that the these purchases are artificially forcing rates lower by directly intervening the market, and it is an inexact science at best.
And with the Fed now eyeing the exit door, it’s only a matter of time before real market forces exert their influence and push mortgage rates higher. In all likelihood this will happen before the Fed is done with it’s shopping spree.