The Federal Reserve recently said that it plans to continue purchasing large quantities of Mortgage Backed Securities to provide support to the mortgage and housing markets, and "it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant".
The concern as always is that the media will spin these comments - telling consumers their own version of reality - something along the lines of this: "Good news, the Fed's words on continuing their purchasing program mean that rates will continue to drop lower, and remain low into the Summer"...thereby creating another round of folks hitting the "snooze bar" on moving forward with a refinance or purchase, which looks to be a very costly strategy for borrowers.
First, many of you have been hearing the objection from borrowers that they are waiting for 4.5%...but here's a reason we shouldn't look to the Fed to help make that happen with their purchasing program. Yes, the Fed has been buying Mortgage Bonds. But, those Fed purchases, are a lot of FNMA 30-yr, 5.5% and 5.0% coupons, which will not have much of a positive effect on present rates.
Note - there is a difference between the "coupon rate" and the interest rate the borrower actually pays. When we are talking coupon rate, this is the rate that the end investor purchasing these Bonds receives. For example, a net 5.50% to the investor - or their coupon rate - has to start off as a significantly higher rate to the borrower. Why? Because the originating firm, the wholesaler, the agencies like Fannie or Freddie, and the securitizing firm on Wall Street all take a little piece. A mortgage rate of 6.25% to the borrower nets down to around a 5.50% coupon.
Why is the Fed buying these Bonds? Well if you think about it, it's very smart of the Fed...and maybe even a little sneaky...because 5.5% Bonds actually represent outstanding mortgages with rates of 6 - 6.50%, which are precisely the loans being refinanced today.
So with rates at present levels, many of the mortgages in these FNMA 5.5% pools being bought up by the Fed will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. This is likely a big reason why the Fed said they could continue this purchasing program beyond June if necessary. Bottom line, the Fed's buying higher rate coupons will not necessarily get rates to 4.5%, but it should put a ceiling on how high rates can go during the near term.
Second, let's address plain old fashioned customer greed. Even though it may make sense for one of your clients to refinance right now, and save $250 per month for example, the greed factor kicks in as clients fall in love with the dream of a 4% handle on their refinance rate...so they wait, and risk the savings of $250 per month in the hopes of gaining another $30 of savings per month.
Clearly, rates could turn higher, and this window of opportunity could pass them by entirely. But here's the most important part: even if they are correct and are able to eventually grab that lower rate and save another $30 per month - think of what they have lost by waiting. While they delayed, they lost the savings they could have gained by taking action sooner - or in the example used, $250 - for every single month they waited. So even if they get the rate they are looking for, it could take years to make up what they lost by waiting.
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