It’s All About Rates
Mortgage rates have been kept artificially low for the past few years due to a governmental stimulus program called “quantitative easing” or QE. Through this program, the government has been purchasing the majority of the mortgage-backed securities issued by Fannie Mae and Freddie Mac. These securities consist of loans originated by virtually all lenders. At rates in the 3% area, most private investors wouldn’t be interested so the government buys up the volume in order to keep the flow of mortgage money circulating. When they stop buying, rates will have to rise.
There has been ongoing speculation as to when the Fed may stop buying or taper their buying of these securities. As the economy improves, the buying has to stop. Last week, Fed Chairman Ben Bernanke hinted that the Fed may stop sooner rather than later and the financial markets went berserk with interest rates rising dramatically. And every day since has experienced extreme volatility in mortgage rates as well as in the stock market.
This week the Fed seems to be trying to do some damage control and it has helped to soften things a little with rates recovering somewhat. It’s almost comical to hear them back peddling to calm the markets. So far, it’s working, at least a little.