Fed dips back into housing finance

September 23, 2011

While financial markets are primarily focused on “Operation Twist,” the Fed’s return to buying mortgage-backed securities has helped that market. MBS have outperformed Treasuries and interest rate swaps since the FOMC announcement.

This has yet to translate into much of a drop in mortgage rates for consumers, however. And even if it does, many economists doubt lower mortgage rates can do much to boost home sales and refinancing, helping to put more cash in consumers’ pockets. Banks are reluctant to lend for a variety of reasons, while consumers are reluctant to borrow due to worries about their jobs and the poor outlook for the economy. Homeowners with underwater mortgages remain unable to refinance their loans — barring a sudden improvement in the market or some type of relief from Washington.

As of early Thursday, the current coupon 30-year MBS were 10 basis points tighter in spread versus Treasuries after a 15 basis points tightening on Wednesday, but the average 30-year mortgage rate is down only 3 basis points overnight to 4.10 percent (albeit a record low) according to Bankrate.com.

For now, the housing backdrop remains grim, as evidenced by a renewed drop in home sales in recent months.




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