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Will Mortgage Lenders Raise Rates When the Government Stops Buying MBS?

Posted by  on Oct 08, 2009
 

Q: I'm waiting a few months to save up a bigger down payment. If the government stops buying mortgage backed securities, will that cause mortgage lenders to charge higher rates?

Right now, economists are having a field day trying to predict how the market will react to different kinds of government intervention. Securitizing mortgage loans reduces risk and often creates short term profits for mortgage lenders and brokers. By purchasing mortgage backed securities, government officials hope to create stability in the market and demand for additional MBS products among large investors. As a side effect, the best mortgage rates come from lenders who intend to resell mortgages to investors quickly.

But the Fed has stated that the debt purchase program will be wound down: "To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October." Many experts are predicting higher interest rates, especially as there is a lot more room for them to increase at this point than to decrease.



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