Fed keeping lid on mortgage rates

Rates for home loans stay at or near record lows

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Mortgage rates remained at or near record lows this week as the Federal Reserve moved to keep a lid on long-term interest rates in order to encourage borrowing in the face of ongoing concerns that the European debt crisis will derail an economic recovery.

The Fed on Wednesday announced a plan to move $400 billion currently invested in Treasurys with maturities of three years or less into government bonds with remaining maturities of six years to 30 years.

That’s likely to make long-term bonds — including the mortgage-backed securities (MBS) that fund most home loans — more scarce, raising the cost to purchase them and pushing down their yields.

In an action specifically targeted at keeping mortgage rates low, the Fed also said it would reinvest principal payments on its holdings of Fannie Mae and Freddie Mac debt ($110 billion) and MBS ($885 billion) back into agency-backed MBS as those investments mature.