Mortgages Rates Down Again, and the Fed Cometh

It’s become an all-too-familiar phrase this year: “Mortgage rates post new record lows.” But aside from that favorable happenstance, what other positive can be found on which to focus in the housing market? Delinquencies, foreclosures, underwater homeowners, borrowers with sub-par credentials and more have been a continuing story for years now, and there is little abatement in those areas. Even record low mortgage rates have limits in how much assistance they can offer, but we may see a new push to help long-term rates even lower in the weeks and months ahead. Whether or not it will do much good remains an open question.

The Federal Reserve conducts a two-day meeting next week to discuss what can be done to stimulate an economy which clearly needs some help. While the Fed might consider a new round of bond or mortgage-backed security buying, the beneficial effects of those programs ideas are believed to largely spent. Instead, two ideas which seem likely to get the most play are changing the mix of the duration of holdings on the Fed’s balance sheet (called “Operation Twist”), which would see the Fed trading in maturing short-term bills and notes in favor of purchasing more longer-term bonds, and/or lowering the interest the Fed is paying banks to park excess funds with the Fed itself.

The concepts themselves are pretty simple. Changing the investment mix means that short-term rates (already near zero, and so hard to force lower) might increase slightly as the Fed purchases fewer of them, while long term rates might decline as the Fed willingly buys these bonds, which will tend to push their prices up and their yields down. Rather than compete against the Fed, this change might push investors to seek out higher yielding “risk” assets, taking money away from the safe haven of Treasuries and putting it to work it the private economy, which in turn might provide some boost to economic activity.

At the same time, lowering the yield banks are earning by keeping money parked and out of circulation might see banks instead pushing to lend or invest in elsewhere in the economy, which might make more money available for lending, and at possibly easier the terms for certain kinds of borrowers, most probably business borrowers.

How much benefit will come from this is a matter of speculation, but there is potential for it to boost GDP growth by a couple of tenths of a percent or so. Given the weak state of the economy — presently hovering around a 1% GDP rate — any boost would be welcome, but any new Fed program is certainly not a panacea for what ails the economy. Perhaps there are other ideas which may come to light when the Fed meeting ends on Wednesday, and more radical ideas may certainly be considered by the Committee, but these seem most likely to come at the moment.

Next week, the focus will be on the Fed and the few housing-related indicators which are due. An improved stock market firmed up interest rates as the week came to an end, and that suggests that we’ll see mortgage rates firm up a little bit next week, probably just enough to lift us off record lows. Of course, a wildcard in the forecast is the Fed; if something unexpected comes in the statement which will come on Wednesday, some additional volatility in either direction might occur.