A few days ago, I posted a blog entry What Happens when Uncle Sam stops buying mortgages??? where I discuss the increase in interest rates that the mortgage market will experience when the Federal Reserve finally stops its purchase of mortgage backed securities from Fannie Mae and Freddie Mac. The $1.25 billion Fed mortgage purchase program was scheduled to end by year end. Most of the capital that is going to originate new mortgages is coming from the Federal governemnt, and until individual investors begin to invest again in mortgage backed securities, or banks are again willing to hold mortgages on their own balance sheet, interest rates may rise substantially when the Fed ends its mortgage security purchase program. It has been estimated that mortgage rates today would be at least two-tenths to a half percentage point higher without the Fed mortgage backed securities purchae program.
Yesterday, the interest rate markets got a short term reprieve when the Fed announced that they would extend their purchase of mortgage backed securities through March of next year This will allow a few more months for the Fed to ease out of the mortgage backed securities market and allow some additional time for the private capital markets to re-establish themselves.
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