July 12, 2024

30 Year Fixed Rate Of 3.5% Likely As Mortgage Rates Plunge

Fed Goes All In

The Federal Reserve announced that it intends to purchase massive amounts of mortgaged backed securities and long term treasury debt.  Yields on the 10 year treasury, from which mortgage rates are based, saw the biggest drop in yield since 1962.

Since mid December of last year the yield on the 10 year treasury had risen from a low of 2.07% to a high of almost 3% yesterday.  Almost half of that 50% increase in yield was erased today as the ten year closed at 2.53%.

Given the Fed’s open ended determination to lower mortgage rates, it is very likely that we may see the 30 year fixed rate mortgage at 3.5% or lower.  The Fed’s plan to purchase a massive amount of mortgage backed securities is certain to cause a large drop in mortgage rates.

U.S. central bankers decided yesterday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home-loan and other interest rates.

Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt

The rationale for seeing generational lows in rates is the same as I proposed on January 12, 2009.

30 Year Mortgage Rates – Is 3.5% Possible?

The Federal Reserve’s direct purchases of mortgage backed securities initiated late last year was successful in its goal of lowering mortgage rates.   The Fed’s direct purchases of MBS has stabilized the mortgage market and lowered rates.  There are arguments being put forth that due to the Fed’s intervention, mortgage rates have artificial price support.  Nonetheless, if the historical yield spread between the bond and the 30 year mortgage is re-established, we may see a 30 year fixed rate in the 3.5% range.  Something to think about for those contemplating a mortgage refinance.

Last week, a borrower with excellent credit, necessary income and home equity was able to obtain a par rate of 4.5%.   The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant.  The major fact to keep in mind is that the Fed appears to be relentless in its campaign to drive down mortgage rates.   If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago.

30 year fixed rate mortgages in the mid 3% range would cause a huge refinance surge.  Keep in mind that over the past five years, homeowners had multiple opportunities to refinance in the low 5% range.  Unless the borrower is taking cash out, it usually does not pay to refinance for less than a one percentage point reduction.   At 3.5% rates, it would make sense for almost every homeowner with a mortgage to refinance again.