Have you ever tried to hold a beach ball underwater? It’s hard to keep that air-filled ball down, isn’t it? It keeps trying to pop back up no matter how long you apply downward pressure. In fact, if you aren’t careful it will end up in your face, with your friends and family members laughing as you go searching for your sunglasses in the water. This analogy is no laughing matter, however, when it comes to our nation’s economy or your personal financial situation. Fixed mortgage rates have been low - extremely low - artificially stimulated by the purchase of Mortgage-Backed Securities (MBS) by an entity that is typically not engaged in the open market in this sector.

On November 25th 2008, the Federal Reserve announced that it would purchase $500B of these securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. This move by the Fed was designed to help with the availability of credit and to lower fixed mortgage rates. The “B” in “$500B” stand for billion, which remember is a thousand-million, so we’re talking about a lot of money. On the news alone, the price of these securities shot up like a rocket, which immediately began lowering fixed mortgage interest rates. For the purpose of this article, just keep in mind that fixed mortgage rates move in the opposite direction of these publically traded securities. This began a flurry of refinances, with 30 year fixed rate percentages available at historic lows, some days even in the in the mid to high 4’s. Additionally, as intended, many individuals got “off the fence” and entered the market to purchase homes while the “cost” of the money was low.

Then on March 18th 2009, the Fed announced that it would add $750B to the $500B to keep the program going throughout the remainder of 2009 and into the first part of 2010. This brought the total purchase commitment to $1.5T, with the “T” standing for trillion. Now, remembering that a billion is a thousand-million, a trillion is a thousand billion. It may be easier to think of like this…a trillion is simply one hundred thousand million. It actually isn’t much easier, though, because the numbers are so staggering that most of us cannot comprehend them. As I write this, we are now just weeks away from the end of this $1.5T MBS purchase program, and while rates have been low now for well over a year and a half, the question is “where do we go from here?”

This is the “ball” we need to keep our eye on, but only time will tell where rates end up after this program has ended. There has been much speculation as to whether rates will rise immediately, or if it will happen gradually over time. Will the private sector fill in the vacuum in the absence of the Fed MBS purchases? Will housing purchases slow down as a result? How will the economy overall be affected? What will the current administration do next if there is a dramatic change in the mortgage market? So many questions remain unanswered.

If you took advantage of the timing to refinance your home from a higher rate loan, or benefitted from the purchase or sale of a home as a result of the rate environment, that’s great. If not, however, this is a good time to pick up the phone and call an industry professional that you trust and respect. I realize that many of you may be in a precarious position based on declining market conditions that have made it difficult to refinance or sell your current home. If you are not aware, there are programs currently available that have been implemented with these situations in mind, but time will not permit me to address those in this article. My purpose in writing on this particular subject is to simply make you aware of the conditions that led to a low interest rate environment and the associated timelines for its termination. Currently there is only $55B remaining until the scheduled March 31st ending date. Keep in mind that this program relates to fixed rate first mortgages, while an entirely different discussion is what the future holds for second mortgages, mostly home equity lines of credit (HELOC) that are tied to the prime rate, which is also currently at historic lows. What we do know is that at some point, like our hypothetical beach ball, these rates too will begin to rise. In fact the manager of our office, 35 year industry veteran Dan Coffey, often says that mortgage rates tend to take the stairs down, and the elevator up. Let’s hope this time they don’t hitch a ride on one of the remaining space shuttle launches!

Remember…keep your eye on the “ball”, and don’t hesitate to call if I can be of service. 
 

Mark Minck
Mortgage Loan Officer
HomeBanc, N.A.

    
Mark Minck is a Mortgage Loan Officer with HomeBanc, N.A. He specializes in residential real estate mortgage lending of primary, secondary and investment homes. His Gainesville office provides local processing and closing of all loans and he is available for a no-cost, no-obligation financing phone consultation at 352-642-1776, or can be e-mailed at mark.minck@homebanc.com. HomeBanc, N.A. is an equal opportunity lender and more information about this excellent lending institution is available at www.homebanc.com.

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