It seems that the Federal Reserve (FED) winding down its policy of buying mortgage backed securities (MBS) from US lenders is already having an effect, with US mortgage rates climbing for the first time in three weeks. More importantly the rate climbed past the 5% mark, which is thought to be a key level that could see demand for housing loans suppressed in a still depressed US economy.
Interest rates on the most-common U.S. 30-year fixed-rate mortgages averaged 5.05 percent for the week ended Feb. 25, up from the 4.93 percent recorded in the previous week, according to the survey released by Freddie Mac (FRE.P) (FRE.N), the second-largest U.S. mortgage finance company.
The figure is slightly below the figure recorded in February last year of 5.07 percent, but above the record low of 4.71 percent recorded in early December. Freddie Mac started the survey in 1971.
"Interest rates for 30-year fixed mortgages followed long-term bond yields higher and rose above 5 percent this week amid a mixed set of economic data reports" Freddie Mac vice president and chief economist Frank Nothaft said in a statement.
Analysts have been worried that the FED's hope for foreign sovereign wealth funds to fill the void in MBS sales left by the end of its buying policy would not be realised, and that this would bring a rise in interest rates. Ironically, such a rise in interest rates will make MBS more profitable and could bring increased interest from foreign funds.
In the meantime the end of the FED's MBS buying policy could hit the housing market, which is still very fragile with a double whammy: it will cause increased mortgage interest rates, and it will also reduce liquidity in the banking sector again, making mortgages harder to obtain (again).
That said: the FED couldn't keep buying the banks' MBS forever, the market was always going to have to return to normal at some point. Perhaps they think it is better getting the rocky-ride over with now, when the wider economy is still a little shaky, so that the two can stand together on their own two feet as they walk slowly into a 2011 recovery.
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