How will Fed decision affect home loan rates?

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How will Fed decision affect home loan rates?

The Federal Reserve on Wednesday announced it’s changing its investment strategy, which could translate into lower mortgage rates down the road, market watchers say.

The committee’s words:

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.



What does that all mean?

Michael Lea, director of SDSU’s real estate center, said officials are basically selling off shorter-term Treasury holdings for longer-term ones and mortgage-backed securities.

“They’re changing the composition of their balance sheet,” said Lea, a past chief economist of mortgage giant Freddie Mac. “This isn’t a new round of quantitative easing. They’re reinvesting, not injecting more money into the economy.”

The decision could push down long-term interest rates, and in turn, mortgage rates.

Why is this needed when home-loan rates are historically low?

“Mortgage rates are not the problem,” Lea said. At issue, is weak demand for mortgages because of income uncertainty and unemployment coupled with tight lending guidelines.

“This will have very little impact on the average person,” Lea said. “It’s meant to signal to markets that the Feds are still trying to do something.”

Greg McBride, of financial site, also weighed in on Twitter.

“What will Fed’s Operation Twist do?,” wrote McBride, referring to Wednesday’s plan. “It might push down mortgage rates. But it will also squeeze bank margins, leading to lower savings yields.”



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