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Edward James Ferrara III spent 8 years (2001-2008) brokering and banking home loans in Orange County, CA to the tune of some 500 million dollars in mortgages funded by May of 2008, when he founded the rate research website FreeRateUpdate.com, now a unique authority on mortgage rates. Ed recently married and became a first time father (Edward James Ferrara IV). Ed also contributes to RealtyTimes.com (syndicated on Yahoo Real Estate). To contact Ed, email him or call (714) 694-5914.

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Effect of Fed’s MBS Exit On Mortgage Rates Unknown

I’ve heard fifty to sixty basis points. I’ve heard one and a half percent. I’ve heard not at all.I’ve heard lots of economists, reporters, TV analysts, and mortgage industry professionals take a stab at predicting the rise in mortgage rates once the Fed discontinues their purchasing of mortgage-backed securities at the end of March.

Supply and demand tells us that once they exit, supply will sky rocket. Somebodies got to fill the void and buy massive amounts of mortgage-backed securities. It’s very unlikely investors will be jumping on these securities right away, they’ll wait for the price to fall a bit. They’re in the business of making money. When the demand goes away, but the supply is still there, prices will drop. When prices of mortgage-backed securities drop, mortgage rates, which move in the opposite direction will rise, but how much?

The Fed uses technology, computer software, to try and put a thumb on the figure factoring in all sorts of variables. They too have done their best to predict what the rise in mortgage rates will be. Obviously, from recent statements, like if needed they’ll re-enter MBS markets and purchase again, they’re not sure either.

In a doomsday scenario, and it is possible, demand for MBS will be so low and prices will plummet so far, 30 year fixed mortgage rates will be driven up into the mid 6’s in a matter of days. If that happens, the Fed will likely begin buying mortgage-backed securities again and over a period of time drive rates back down.

Ed Ferrara – http://www.freerateupdate.com/

There Is 1 Response So Far. »

  1. We will see 100 to 200 basis points. The reason that we won’t see more is because of a severe lack of consumer demand for mortgage products. The biggest difference that we will see is down payment requirements. These will increase dramatically to a range of 20 to 40% down for non-FHA. The down payment requirement will not decrease to 10% and below until house prices and rents are aligned. Only FHA will be ‘affordable’ after the government withdraws from the MBS market.

    If you were to loan your money to somebody in the form of a mortgage; what LTV would you feel comfortable with? Now that the banks don’t (won’t) have a guaranteed buyer to pass mortgage risk onto, they may well be lending their own money (like they used to)!

    Paul Ashton, CLMO.org/Turbomodification.com

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