Fed Begins Buying MBS, Pushing Down Mortgage Rates

Yesterday the Fed bought their first round of mortgage securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. This kicks off the Federal Reserve's plan to buy $500 billion in mortgage-backed securities by mid-2009, right on schedule. One of many historically unique programs to drive down the affordability of home buying and return much needed buyers to the market.

Early indications in bond markets are that the buying is having its intended effects. Yield spreads are tightening as mortgage bond yields continue to move downward. The net effect is mortgage rates are expected to decline. The simple announcement of the program on November 25 sent the average 30-year fixed-rate down to near 5 percent from 6 percent. The actual buying is expected to take even more out of that rate, potentially down to the much discussed 4.5 percent.

Despite the good news on mortgage rates some pundits are hesitant to celebrate. Rates are simply one component of getting mortgages closed and housing inventory moving. Already experiencing a record jump in mortgage applications, lenders are struggling with capacity. Of course, a surge without capacity and aggressive capital markets leads to little incentive to open up lending, or approval guidelines.

However, there are signs that the securities is moving in the right direction. Reports from bonding trading insiders are indicating that the momentum is flipping from unloading mortgage securities to looking buy them back.

The markets are certainly at a consensus that recovering the housing sector is a pre-requisite to recovering the broader economy. And, buying a ninth of agency-owned MBS market seems like a bold way to purchase recovery.

Low rates, government guarantees, and return of investor confidence in mortgage assets seems to be moving the needle on the housing market.