Fed to stop buying mortgages, interest rates, home values and swine flu pandemic : Bad Credit Advisor

Fed to stop buying mortgages, interest rates, home values and swine flu pandemic

Will Fed stop buying mortgages and mortgage backed securities, comes this April? I do not think so, unless of course, the Fed wants interest rates to rise, home values to fall and economy to suffer even more. And what it all has to do with swine flu pandemic? Just read on. With all the talk generated by the Federal Reserve pledge to stop buying mortgages by the end of March, many builders and mortgage investors are getting quite worried, and that putting it mildly. For starters, I do not think it will happen. All the talk about improving economy is just that, the talk. Take away low mortgage rates and government incentives for home buyers, housing market will get to a complete standstill. Just look at the abundant empty retail space, unsold homes in your area and recent earnings from Alcoa, FedEx and others. And everyone has been saying the same for the last year - economy reached a turning point, but we are not there yet. Right, not there yet, nevertheless, may be Fed is playing a smart game. By stating that it will stop buying mortgages, it pushes those who would otherwise wait, to buy homes and lock the interest rates before end of March. Since everyone cries that if the Federal Reserve indeed stops buying mortgage backed securities, interest rates will go up by at least one percent and possibly more, while home values will loose another 20 percent. So the would be smart home buyers, who of course, are simply gullible fools, rush in to find homes and lock rates before it is too late. And easily duped home owners are refinancing like there is no tomorrow, paying hefty fees and closing costs. Is that why mortgage applications rise in first week of 2010? Speaking of the fees and closing costs, every time I stop in my local Chase branch and another local bank, I see the loan officers briskly selling home loans with at least 0.5% point in fees, close to $2,800 in closing costs and rather high interest rates. You will do yourself a huge favour by going to a mortgage broker who will get you a lower interest rate and cover your fees and costs. Then again, I should stop worry about your money.

Now what does the Fed to stop buying mortgages have to do with swine flu pandemic? Nothing and everything. In my opinion, all the noise and horror stories about that flu was another form of stimulus package, this time a world wide one. Since what was supposed to be a deadly pandemic, has been so far nothing more than a serious cold, many governments are getting quite upset. So the Council of Europe, whatever it is, is launching a probe into vaccine manufacturers, including Baxter, GlaxoSmithKline and Sanofi-Pasteur, after reports that they pressured the World Health Organization into declaring swine flu pandemic to sell as much of needless vaccine as possible to maximize their profits.

So you see, our Fed is much better positioned than those poor pharmaceuticals. First of all, you can not sue the Fed, can you? Second, those silly Europeans can not print U.S. dollars the way Fed does. Third and most importantly, the Fed knows that by making you to buy and refinance now, and otherwise spend money based on your conviction of future higher rates, it will get another wave of mortgage related business from those relieved folks who waited, after it announces that its mortgage buying will continue for the time being.

They, the Feds who now hold over $900 billions of mortgage-backed securities, also realize that many people will not worry about further drop in home values if it deems quite affordable today. After all, it is still all about low monthly payments for many as well as those incentives. By the way, by now, Fed has purchased 73% of the mortgages that government-backed Fannie Mae, Freddie Mac and Ginnie Mae have turned into securities. Purchases by the Treasury pushed total government purchases above $1 trillion. So may be Fed looks for another way to make money. If it stops buying mortgages and the interest rates will go up as the result, the mortgage backed securities may become attractive for investors again, and they will be paying high premiums. I am talking about large mutual funds, pension funds, sovereign funds, etc.

Wed Jan 13, 2010 11:01AM by Tony | More in Economy | Comments (0)

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