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The Fed's been at it again, offering words that sound encouraging at first blush, confirming that their
buying program of Mortgage Backed Securities is in full swing and will continue as needed. Of course, the
media will pick this up and offer their own interpretation, saying "Good news, the Fed's words on
continuing their purchasing program mean that rates will continue to drop lower, and remain low into the
summer..." But is this really what that means? Not so.
Here's the truth.
Yes, the Fed has been buying Mortgage Bonds, but if you look at what they are purchasing, they are
buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds...which won't have much of an impact on present
interest rates. Why? First, see the Fed's purchases for yourself by hitting this link: Direct Link to View Fed
Mortgage Bond Buying - http://www.newyorkfed.org/markets/mbs/index.html.
So why is the Fed buying these Bonds? Well if you think about it, it's very smart of the Fed...and maybe
even a little sneaky...because 5.5% Bonds actually represent outstanding mortgages with rates of 6 -
6.50%, which are precisely the loans being refinanced at today's great interest rates.
Stay with me here...
With rates at present low levels, many of the mortgages in these FNMA 5.5% pools being bought up by
the Fed will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. And
this is likely a big reason why the Fed said they could continue this purchasing program beyond June, if
necessary. Bottom line, the Fed buying these higher rate coupons will not necessarily help rates to move
lower, as their actions do not impact the loans being originated at today's low rates.
Here's the most important part.
Sometimes I talk to clients who are in a situation where it makes sense to refinance right now, and save
$250 per month for example. But when they hear the media throwing around teases of lower rates ahead,
they decide to hold off on making the decision to save the $250 per month right now, in the hopes of
gaining another $30 per month in additional savings with a lower rate than where we stand presently.
Now clearly, rates could turn higher, and this window of opportunity could pass them by entirely.
The clincher is this:
Even if those clients ultimately are correct in timing the market, and eventually grab that lower rate and
save another $30 per month - think of what they have lost by waiting. While they delayed, they lost the
savings they could have gained by taking action sooner - or in the example used, $250 - for every single
month they waited. So even if they got lucky and obtained the rate they were looking for, it could take
years to make up what they lost by waiting.
I don't want anyone to miss an opportunity by either waiting, or not understanding what is at stake. Let's
talk further on this - call or email me and let's discuss what this might mean for you.
Clay Edwards
Rooftop Lending
408-629-2529 Office
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