Fed Leaves Door Open to Extend Mortgage Backed Security Purchases

I’ve been curious lately about the end of the Mortgage Backed Security (MBS) purchases by the Federal Reserve in March. The Fed is planning to end the program in less than 60 days on March 31^st. Currently they stand at about 94% having purchased 1.17 trillion of the 1.25 trillion allocated to purchase these securities.

So while they’ve nearly fulfilled the entire program, I did some digging and found there’s starting to be some chatter about them extending the program. We, of course, can recall to the first-time buyer credit extension being announced just as the initial credit was expiring. The Fed states rates will remain unchanged over the course of the next 6 months meaning they believe the next 2 quarters are critical to gauge if the economy strengthens. The MBS program has been keeping consumer mortgage rates low and many fear a full 1% rise in rates when the program expires.

Although the Fed recently restated its intent to cease the program on March 31^st, there are multiple opinions amongst the Fed Presidents. During an interview with Nightly Business Report, New York Federal Reserve President William Dudley said, “Obviously, if mortgage rates were to back up a lot and if that had big consequences for the economy, the we very well could rethink the issue about whether or not we wanted to buy more mortgages.” In a separate interview with the Associated Press, Dudley liked the situation to the Fed driving a car. “If there’s a sharp turn in the road the Fed will adjust course. Nothing is on auto-pilot,” he said.

Dudley believes there is a good amount of liquidity in the marketplace now which will step in when the program expires. Whether you are for or against government intervention, there is obvious stimulation of the lending markets by this program. The larger banks are shoring up their balance sheets and paying back TARP funds. Last week PNC Bank just announced it was paying back its $7.6 billion dollar loan. Bank of America, Citibank, and Wells Fargo have paid back their TARP loans already with interest. As the liquidity increases within the banks, they’ll start buying the mortgage securities again which should help maintain low rates.

Interest rates crept over 5% last week according to Freddie Mac’s mortgage survey. That was the first increase in mortgage rates in 2010. With the Fed being concerned about the rates, any extension in the MBS purchasing program will likely have to do with where rates are in 60 days. For real estate investors the value in the low rates is not only cheap money but ensuring certain types of loans, particularly non-seasoned rate and term refinances, continue to be available. Many investors are currently using this loan to take out bridge financing or hard money when they purchase foreclosures and fix them. This 2 structure loan allows them to do these transactions with less than a traditional 20% down payment.

Whether you buy and hold, wholesale, or broker investment transatctions, what the Fed does on March 31^st can impact your business significantly.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.