How Does the Government Buying Mortgage Backed Securities Affect Mortgage Rates

The Federal Reserve confirmed this week that it plans to continue with its stimulus plan to support the economy.  The plan includes buying back $40 billion of mortgage backed securities (MBS) a month until the job and housing markets report a consistent turnaround.  Expectations are that this plan will put downward pressure on interest rates, while also decreasing fixed mortgage rates.  Federal Reserve Chairman Ben Bernanke previously announced that under his watch, interest rates would not be moving anywhere until 2015.

But what does a buyback of MBS mean for you and your mortgage?  Securities are actually bundles of outstanding debts owned by creditors such as banks and credit bureaus.  Mortgage Securities are outstanding or default mortgages purchased through housing firms like Fannie Mae or Freddie Mac.  With the Federal Reserve purchasing some of these outstanding loans, the housing firms receive new lending capital in return.  This new money can then be used to finance new mortgage applications and expand on home sales in the housing sector.

Nancy Vanden Houten is an analyst at Stone & McCarthy Research, a global bond and economic research forum that analyzes activity in the housing market.  She says that because the housing sector has greatly contracted due to the recession, the Fed’s plan actually includes a large portion of the outstanding loans.  As a result she believes the plan to maintain low interest rates will work.  However, she also cautions that the plan will not be the entire solution to the housing market’s problems.

“Asset purchases and low rates can’t change some of the conditions that prevent borrowers from taking advantage of those rates, like tight lending standards. But some of those conditions might be improving.”

Houten says the Fed’s policies over the last few years and especially with this latest round of stimulus are related to lowering mortgage rates.  Although many potential home buyers may not be able to take advantage of these new plans due to tighter lending rules, Houten says if housing shows further signs of recovery, the plan may work.

“Along with the Fed’s commitment to remain accommodative into 2015, ongoing support for the mortgage market might produce a little more bang for the buck if other aspects of the housing market improve.”