PIMCO’s Scott Simon on mortgage rates and housing

Normally I’m not a huge PIMCO follower.  In case you don’t know PIMCO is the world’s largest bond investment money manager and home to many top name economists and analysts.  The comments made by PIMCO officials often get headlines almost like an official of the Fed. And although I don’t “goon” for PIMCO like many do I came across this blog post this morning and found Scott Simon’s comments interesting.  So, I guess I’ll jump on the band wagon and publicize them too:

-On mortgage rates:

We are unlikely to see a significant market disruption in the Agency market stemming from the Fed’s retreat. … if and when we see mortgages cheapen, we expect to see private institutions stepping in to buy. Even a 15 basis point move could spark a flurry of buying. Therefore, we don’t expect a major widening of mortgage spreads …

Translation: He doesn’t expect to see mortgage rates move sharply higher following the Fed’s expiration of the TALF program which helped subsidize mortgage rates over the past year.

-Will the Fed reenter the MBS market and buy rates down again?

Probably not. Barring a major double dip in the economy or housing, private balance sheets have plenty of room to add Agency MBS (unlike in late 2008, when the Fed program began).

-On housing:

We continue to believe that lower-priced homes bottomed last year. Higher-priced homes should bottom later this year. If one labels recovery as prices rising dramatically, we do not foresee that anytime soon.

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 WSJ.com 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.

Rate Update November 25th, 2008

Mortgage rates are SHARPLY LOWER THIS MORNING.

The Federal Government announced today that they would step in and buy up to $600 billion in Fannie Mae/ Freddie Mac mortgage-backed bonds.  The additional demand that the TALF program (Term Asset Backed Securities Loan Facility) will create for mortgage-backed bonds has caused rates to move sharply lower this morning.

Current outlook: neutral- definitely a great opportunity to lock