Fed Debt Monetization Moves Spark Refi Madness
Interest-Rates / Quantitative Easing Mar 20, 2009 - 04:28 AM GMT
Mike Larson writes: The Federal Reserve has done it now. In poker terms, it's gone “all in.” Specifically, the Fed said this week that it will ramp up its purchases of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS) from $500 billion to a whopping $1.25 TRILLION in the coming months. The Fed is also going to double its purchases of Fannie Mae, Freddie Mac, and Federal Home Loan Bank bonds to $200 billion from $100 billion.
And for the icing on the cake …
The Fed will buy as much as $300 billion in longer-term U.S. Treasury securities. It's going to focus on Treasuries with maturities between two and ten years, and make purchases two or three times a week.
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| Printing money and using it to buy our own debt is Banana Republic-type stuff. |
I'm going to call it like I see it here:
This is Banana Republic-type stuff! And I'm not talking about the clothing store. Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes.
We're essentially monetizing our country's debt and deliberately devaluing our country's currency. We're also screwing over our foreign creditors — a dangerous path to tread considering we're a net debtor nation that's trying to borrow tens of billions of dollars a month to fund our massive deficits.
But what's done is done …
We've gone off the edges of the map now, and in a way that I think will ultimately end badly. Indeed, the Fed's actions sparked the biggest one-day plunge in the U.S. dollar in several years. Gold also surged, a vote of no confidence in central bankers' willingness to preserve our purchasing power.
The Impact on Treasury And Mortgage Rates …
The currency and metals markets weren't the only ones rocked by the Fed's moves. Long bond futures rocketed more than eight points in price soon after the Fed announcement hit, before pulling back a bit. The yield on the 10-year Treasury Note, which had been flirting with the 3 percent level, plunged roughly 50 basis points in the blink of an eye.
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| After the Fed's announcement, the yield on the 10-year Treasury Note plunged roughly 50 basis points in the blink of an eye. |
These are unheard-of moves in the Treasury market! Indeed, a rise or fall of two points in price — or, say, 15 basis points in yield — is considered a big deal. We also saw a big move in the home loan market, with MBS prices rising and mortgage rates falling.
The last weekly survey from the Mortgage Bankers Association pegged the average 30-year mortgage rate at 4.89 percent. That tied the record low set in January. I expect we'll head down to the 4.5 percent level as the impact of the Fed's latest move settles in.
How does 4.89 percent compare to previous lows?
Consider that the lowest annual average mortgage rate seen in the 20th and 21st centuries was 4.7 percent, set right after World War II. In other words, this is just about the cheapest that mortgage money has ever been.
Whether you agree with what the Fed is doing or not, one thing is crystal clear: It's having a major impact on interest rates.
But enough about the big-picture macroeconomic stuff. Let's talk about what the latest round of largesse from the federal government and the Federal Reserve means for rates and your PERSONAL finances.
Specifically …
Is This the Right Time to Refi Your Mortgage Or Buy a New House?
If you have a mortgage, now is the time to get in touch with your lender and see what he or she can do for you. A typical rule of thumb is that if you can save one percentage point on your interest rate, you may want to go ahead and refinance.
But keep in mind that refinancing isn't free …
You'll have to pay upfront fees for everything from a title search to an appraisal to prepaid interest. Those costs can run several thousand dollars, depending on the size of your loan and where you live. So before you decide to refi, make sure you're going to keep that new mortgage with those lower payments long enough to recoup your upfront costs.
There is one alternative: You can have your lender cover most of your closing costs. But if you do so, you'll have to accept a higher mortgage rate in exchange.
Also be prepared for a long line at the lender's office, or a long wait time on the telephone. Because of this latest Fed action and the recent roll out of the Obama mortgage plan, lenders will be swamped with calls.
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| It's a buyers' market right now. And prices are likely to decline further. So even though interest rates have dropped, you don't need to rush into anything. |
So what if you were considering buying a house? Is now the time to jump in? Will the Fed's move have as big an impact on home buying as it's having on the refinance market? In one word … NO.
Look, refinancing to grab a lower rate and payment is a no brainer when rates plunge. But the decision to buy a house or not depends on a lot more than financing costs …
You have to think about whether your job is secure. And you have to take the likely direction of home prices — lower — into consideration. Does it really make sense to jump in and buy now when the employment outlook is so uncertain? Or when home prices will likely continue to fall for the next year to 18 months?
Personally, I'd encourage you to tread carefully. Take your time. There's no need to rush in and buy now with so many homes to choose from and prices likely to decline further. You, as a buyer, have the upper hand now and will likely continue to have it for some time.
Until next time,
Mike
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