Mortgage Rates Vulnerable to Feds' Decisions

After a year of low mortgage rates, consumers have become accustomed to their presence, so much so, that a slight increase in interest rates will slow down the incoming of mortgage applications. Existing homeowners and new borrowers have basically forgotten about a time, not long ago, when mortgage rates were considered low at 6% or 8%. The time has come for consumers to realize that this era of low rates will not last forever. In fact, low mortgage rates are right now vulnerable to the Feds decisions. While no one knows for sure, this could be the last year for these historic borrowing rates.

Last week, the minutes to the December Federal Open Committee Meeting in December were released. It was quickly noted that in that report, there was a lack of complete support among Fed members for the long term Fed purchase of mortgage backed securities (MBS) and Treasuries. The Federal Reserve has been purchasing $40 billion worth of MBS since September of 2012 in an effort to keep mortgage rates down. This move is part of a plan to pursue the continuation of the housing market recovery that became evident during last year. It is the Fed's expectations that by keeping interest rates down, more consumers will purchase homes which will increase the need for jobs. Others will refinance which will increase their cash flow and be put back into the economy which helps economic growth. The Feds stated at the December meeting that they expect to continue with their plan, also known as QE3, until unemployment falls below 6.5%. The report indicated that some Fed members want to continue the QE3 program until the end of 2013 while others wanted it ended sooner. There were yet others who want to see it halted right away.

The low mortgage rate environment has definitely helped the housing industry climb out of the deep hole it was in, although it is not back to where it was during the housing boom. According to the National Association of Home Builders/First American Improving Markets Index (IMI), the number of metropolitan areas increased for the first straight month in January to 242 from 201 markets in December. The IMI is a record of metro areas where there has been improvement in housing permits, employment and home prices for a period of six consecutive months. This is also a positive economic sign for home buyers since these markets are spread across the country.

The housing market has also been helped by the government program, HARP, created for refinancing underwater mortgages. The HARP program is for loans that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009 and will sunset at the end of 2013. HARP loans have helped many homeowners obtain lower mortgage rates and, thus, prevented many from choosing a strategic default. Short sales in lieu of foreclosure have also helped stabilize the market and communities, especially those that were hard hit by the housing crisis. The reduced fees for the FHA streamline loan for homeowners who have loans that were endorsed prior to June 1, 2009 was another program that was created as an incentive to bring in FHA mortgage holders to refinance. This offer will also be over at the end of 2013.

Surprisingly, the high end property market has also seen a turnaround in home buyer traffic and sales. Since jumbo mortgage rates are only slightly higher than conforming mortgage rates, these too have been at record lows. More lenders have entered the jumbo loan market which is creating more competition and keeping jumbo rates down.

While it is obvious that the housing industry is going through a recovery, this recovery is contingent on mortgage rates being kept low and affordable. Any decisions made by the Federal Reserve regarding rates could make or break the industry at this point. This is a fragile recovery that relies on consumers feeling confident about the economy, as well as, the continued affordability of housing.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders' rate sheets to determine the most accurate mortgage rates available to well qualified consumers at about a 1 point origination fee.