2010 East Bay Real Estate Update: Mortgage Interest Rates Rising In Q2, Q3, Q4!

The $64 Billion Dollar Question is, “When will the Federal Government stop purchasing Mortgage Backed Securities?”  You may ask why this is an important question.  Well,  the purchase of MBS by the Feds is the method in which they are guaranteeing mortgages so the lenders will continue to write them – assuring the lenders there is no risk to the home loan because it is risk-free.  From what I am noticing for the last twelve month trend of the Feds buying MBS, it may be just about over.  When it is over interest rates will begin rising in the very near future.

Did you know the Feds are scheduled to stop making MBS purchases by March 31, 2010? As you review the above chart you notice that the Feds are rationing out the remaining portion of the stimulus money as their purchase amounts are dwindling to what is expect to be a trickle within the next 60 days. For example, last week the Fed purchased $11 Billion in Mortgage Backed Securities, which leaves them with $66 Billion to spend out of their original $1.25 Trillion allotment. So about 95% of the total has already been spent and has purchased about three out of every four home mortgages the past twelve months. When such a large player in the market – the Feds, leaves, it is very likely that home prices may decline further because of it being more difficult to entice Buyers to borrow money because of the increased interest rates.

This information is critical because as the Fed has less money to purchase MSB through the remaining months of the program, their ability to keep home loan rates low via their purchasing power will come to an end. And those who can take advantage of currently low home loan rates,  DO NOT WAIT, as these historically low rates will not last much longer.

Last week, Fed Chairman Ben Bernanke gave a speech that included a number of topics, with the most important topic being the switch of the Fed’s benchmark from the commonly watched and monitored Fed Funds Rate, to a new benchmark of “interest paid on excess reserves”.  Banks are required to keep money on reserve with the Fed and may, from time to time, have an excess in those reserves, which the Fed can pay interest on.  This is the first time in history that the Feds have allowed Banks to get interest on their excess reserve money.  This may motivate Banks to increase their excess reserve because of making a guaranteed interest return on that money.

Since the Fed Funds Rate is only a “target rate”,  banks can still lend money to other bank overnight at their own negotiated rate. Sometimes near the end of the trading day, banks have been lending their excess reserves out overnight for a rate that differs from the Fed Funds Rate, but is higher than interest on those reserves from The Fed.  This undermines the Fed’s ability to set a reliable benchmark “target rate”.

The Fed wants to fix this by using the amount of interest they pay as the new benchmark, since the Fed has total control of this rate, which should be right at or just under the Fed Funds Rate.  There key lesson regarding the information in the blog posting….it appears that the Fed is getting prepared to push interest rates higher. And when they do increase rates, the Fed does not want any obstacles that may undermine their plan.

Jim Walberg’s Conclusion? If you are planning on purchasing a home in the East Bay in 2010 it is time to take action TODAY!  Mortgage money is cheap!  Home prices are at record lows!  There are highly motivated Sellers waiting for the fair offer.  Contact me if you have any more questions regarding how to arrange the purchase of your next home.

Related posts:

1. East Bay Real Estate Update: 2010 Tax Incentive Windows Are Closing!
2. 2009 Mortgage Interest Rate Predictions!
3. East Bay Mortgage Rates Are Not The Issue! Credit Is The Issue!

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Filed Under: Blog, Buyers, Featured Posts, News, Sellers

Tagged: Ben Bernanke, Federal Reserve System, Jim Walberg, Mortgage Backed Securities