Good & Bad news for mortgage rates in Fed’s announcement

The Fed announced today that they would keep open market operations in the mortgage-backed bond (MBS) market active into early 2010.  This is great news for mortgage rates.  There had been growing speculation that the Fed would discontinue the TALF program which has been credited with keeping mortgage rates near historic lows as the eocnomy gradually improved.  However, the Fed also mentioned that they would not increase their commitment to purchase MBSs from the current $1.25 trillion amount.  Therefore, we still expect mortgage rates to rise into 2010.

The Fed’s TALF program has created substantial demand for MBSs since the program was announced last November.  The additional demand has pushed MBS prices higher which pushes yields lower.

Here are a couple excerpts from the article:

*The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities.

*Mainly because of heavy government intervention in the mortgage market, interest rates remain near their lowest levels in decades. Rates on 30-year fixed-rate conforming mortgages currently average 5.24%, down from a recent peak of 5.81% in June but up from the year’s low of 4.84% in late April, according to HSH Associates, in Pompton Plains, N.J.

*The Fed is about two-thirds of the way through its mortgage-purchase program, which was launched late last year to support mortgage lending, housing activity and broader credit markets. The central bank’s decision to complete the full $1.25 trillion in purchases of mortgage-backed securities — rather than “up to” that amount, as it said in August — ended speculation that it might stop short, as a handful of policymakers have suggested. The Fed still plans to buy up to $200 billion in debt issued by Fannie Mae and Freddie Mac.

*Mortgage rates were expected to rise throughout the fall and winter as the Fed wound down its program to buy the mortgage-related securities. Even if they inch up, now they’re less likely to increase as sharply, given the Fed’s longer time horizon that stretches to March.