Fed Seen As Unlikely to Take Strong Action to Lower Mortgage Rates

The Federal Reserve is unlikely to take strong actions to bring mortgage rates back down again when it meets later this month, the Wall Street Journal is reporting.

The sharp rise in mortgage rates in recent weeks has dampened what had been a boom in mortgage refinancing and has threatened to squelch signs of a budding recovery in the housing market. Midweek surveys by Freddie Mac, HSH Associates and Bankrate reported average rates of 5.59 percent, 5.79 percent and 5.96 percent, respectively, on 30-year fixed mortgages, representing increases of approximately three-quarters of a percent in the past two weeks.

Five percent mortgage rate targeted

The increases have given rise to speculation that the Fed may accelerate its scheduled purchases of over $1.5 trillion in mortgage-backed securities and Treasury notes to bring rates down again. The Fed has previously expressed the view that it would like to see mortgage rates remain around 5 percent to stimulate an economic recovery.

However, with the economy showing signs of recovery, there is disagreement among Fed officials as to whether additional stimulus is needed, according to the WSJ. Some believe more should be done to help the economy recover more rapidly, while others are concerned that it may be time to start pulling back in order to minimize the risk of inflation.

Without a consensus on the direction to go, strong new actions are unlikely. However, the Fed may make smaller adjustments to address current economic conditions.

Super-low rates not likely to return

Absent strong action by the Fed, mortgage interest rates are unlikely to return to the sub-five percent range of recent months, unless the economy takes another nosedive. That's bad news for homeowners who hoped to refinance their mortgages under the administration's Making Home Affordable/Home Affordable Refinance Plan, which was designed to take advantage of the ultra-low rates of previous months.

With rates in the 6 percent range, fewer homeowners will be in a position to benefit from refinancing, unless their current rate is 7 percent or above, or they have a zero percent or adjustable rate mortgage (ARM) that is about to reset to a higher rate.

ARMs an option for low rate mortgage refinance

In the current market, many lenders are saying that it might make sense for borrowers to again start considering adjustable rate mortgages, which are presently ranging about three-quarters of a percent below 30-year fixed mortgages. Though ARMs are sometimes blamed as a cause of the subprime mortgage crisis, many bankers say that blame is misplaced, because the real problem wasn't in the loans themselves, but the creditworthiness of the borrowers they were extended to.

They say that for persons who only expect to be in a home for five or seven years, have a mortgage that's about to reset anyway, or who simply need to reduce their mortgage payments to get through the next few years of a soft economy, an ARM might still make sense.