Current mortgage rates and the market
Every week, this column addresses national average mortgage rate changes as reported by Freddie Mac and the Mortgage Bankers Association in their weekly surveys. Those small, short-term fluctuations are largely determined by the market. But the underlying fact that mortgage rates are still near 50-year lows is largely a result of federal government policy.
And that public sector support can't last forever. So what will happen when the private sector once again takes control of mortgage loan rates?
Mortgage loans and the government
When the housing bubble finally burst, the financial prospects of countless millions of Americans were so bleak that the government was forced to intervene in the mortgage loan market, led by leaders of both political parties.
The government's actions have had two principal forms. First, the limits on Freddie Mac's and Fannie Mae's residential lending were lifted. And secondly, the Federal Reserve undertook a $1.25 trillion program of mortgage-backed securities (MBS) purchases to free up private lender money for internal stabilization and renewed external lending.
Best mortgage lenders are Fannie and Freddie?
A recent Wall Street Journal article explained why the government can't yet pull its support for Fannie and Freddie:
The government is willing to tolerate such open-ended exposure for two reasons. First, it sees the companies as essential cogs in the fragile housing market. Fannie and Freddie buy mortgages originated by others, holding some as investments and repackaging others for sale to investors as securities. Together with the Federal Housing Administration, they fund nine in 10 American mortgages. Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.
Second, the companies are a convenient tool for the administration to use in its campaign to clean up the housing mess.
But, of course, even the U.S. government can't afford to prop up Fannie and Freddie indefinitely. Rep. Barney Frank, D-Mass., who chairs the House Committee on Financial Services, has said that he wants to scrap both bodies, and replace them with a wholly new housing finance system. But others want the government's role in the mortgage loan market to be scaled down both substantially, and quickly.
Lowest mortgage rates and the Fed
In February, the Washington Post explored the Fed's dilemma over when and how - and how publicly - to slow and then eventually withdraw from the market the massive sums it has pumped in to keep the housing market and broader economy afloat:
Fed Chairman Ben S. Bernanke is betting that if the central bank is open about how it will phase out its expansive initiatives to prop up the economy, it will provide faith that the Fed will not allow inflation to flare down the road. That in turn would help keep long-term interest rates low and could allow the Fed to keep the short-term rates it controls at ultra-low levels for longer.
...But that strategy comes with risks. Most notably, investors may interpret the talk about reducing the money supply as a sign that those steps are imminent. That could prompt interest rates to rise sooner than the Fed would like, which could slow the economic recovery or even stop it.
In other words, peeking behind the Fed's curtain would reassure the markets in the long term, but potentially complicate the recovery in the short term.
The Fed must also decide whether and when it should begin to sell off the MBS it has already bought. There are sound economic reasons why it could otherwise do so beginning very soon, but, as the Post points out: "...selling the assets probably would drive up mortgage rates, damaging a housing sector whose recovery is slow and fragile."
What this means for you
If you're thinking of buying your first home, trading up or refinancing, you should be aware of the pressures that may well force rates up. And if you conclude that you should wait no longer before acting, you can compare mortgage rates here.