Mortgage Rates Expected to Fall Following Fed Action

Mortgage rates are expected to drop still further in the wake of Wednesday's announcement by the Federal Reserve that it will make major purchases of both mortgage-backed securities and Treasury notes in an effort to jolt the flagging economy. The Fed's action is expected to further reduce already low mortgage interest rates, though qualified borrowers will likely need to move quickly to take advantage of them.

Mortgage rates began Wednesday at a national average of 5.03 percent for a 30-year fixed mortgage and will likely go even lower. But the combination of high demand due to historically low rates and fewer lenders available due to the recent economic shakeout means that qualified borrowers should act quickly or possibly face long waits for long approval.

The Federal Reserve announced that it will purchase another $750 billion in mortgage-backed securities, on top of $500 billion in such purchases already announced this year. It also announced that it plans to buy back $300 billion in long-term U.S. Treasury securities over the next six months. Taken together the two moves are expected to drive interest rates lower in an effort to free up lending. The Fed will also double its purchases of debt held by lenders Fannie Mae and Freddie Mac to $200 billion.

Stocks rose sharply in the wake of the announcement, which followed the conclusion of a two-day meeting of the Federal Open Market Committee. Treasury notes rallied as well, with yields on the benchmark 10-year note dropping more than half a percent to 2.50 percent, the biggest drop in nearly 40 years.

"Markets are acting surprised. But if we look back at everything (Fed Chairman Ben) Bernanke said the past few weeks, we shouldn't be," said Dan Green, loan officer with Mobium Mortgage in Cincinnati and author of The Mortgage Reports Web site. "He and (Treasury Secretary Timothy) Geithner have been talking about the need to take action and now they've done it."

With historically low rates creating high demand for new mortgages coupled with fewer lenders available to service those mortgages, qualified borrowers may face long waits in finalizing their mortgages. As a result, qualified borrowers may wish to consider "locking in" fixed rates for longer than the traditional 30 days, to as long as 45 days or even 60.