Mortgage

2% mortgage fee may "quickly" go away, per Fed assembly

Higher mortgage rates are coming soon

After a Fed meeting that ended on Wednesday, September 22nd, it is becoming more and more likely that mortgage rates will rise – and "soon".

Chances are that it will do so from November 3rd (the date of the next Fed meeting). But interest rates could rise as early as October.

If you are waiting to take advantage of today's great prices, you may not want to wait long. The low-interest refinancing window could close in a few weeks.

Find your lowest plan. Start here (23.09.2021)

Why the Fed Matters on Mortgage Rates

First, let's get one thing straight: the Federal Reserve doesn't set mortgage rates. But it kept those rates artificially low over the past year.

The Fed has been buying mortgage-backed securities (MBS) since March 2020. MBS are a type of bond that largely determines mortgage interest rates. And when more money goes into MBS – like the $ 40 billion monthly fed by the Fed – interest rates go down.

The Federal Reserve currently owns more than $ 2.5 trillion in MBS. The sheer volume skewed the mortgage market, pushed rates below 3% and held them there through 2021.

Mortgage rate trends during Covid

Source: Freddie Mac

However, this should always only be a short-term program to counter the worst economic effects of the COVID-19 pandemic.

And the Fed is now trying to reduce its MBS purchase program to zero. This is known as "tapering" in Fed jargon. And if it does, it will likely push mortgage rates past the 2% mark.

Find Your Lowest Mortgage Rate Before Rates Go Up (September 23, 2021)

The news from this week's Fed meeting

The Federal Open Market Committee (FOMC) is the decision-making body of the Federal Reserve. It met this week to discuss current monetary policy – even if the Fed could begin to pull away from its Covid stimulus programs.

In a statement followed by a press conference, the FOMC made it clear that it plans to reduce its purchases from MBS shortly. In the Fed's own extremely cautious words:

"If progress continues broadly as expected, the Committee believes that moderation in asset purchases (including MBS) may soon be warranted."

When does tapering start?

Almost every financial journalist and Wall Street analyst expects the FOMC to announce plans to start cutting immediately after the next Fed meeting on November 3rd.

However, we should have some indication of what will happen to the courses on October 8th.

The September employment report will be published on that day.

If the employment report turns out to be disastrous, mortgage rates could fall in October as the Fed could delay the throttling until at least December 16 (its last meeting of the year).

However, if the employment numbers are good, mortgage rates could rise as early onset of tapering seems inevitable.

How much could mortgage rates rise in 2021?

Most economists assume that mortgage rates will almost inevitably rise with tapering. But how much?

Well, we can look for a clue in history. Because the Fed announced that it would phase out a very similar program in 2013. And following that announcement, mortgage rates soared more than a full percent over the next several months.

The St. Louis Fed recalls what happened:

“On May 22, 2013, Federal Reserve Chairman Ben Bernanke announced that the Fed would begin curbing bond purchases at a later date, causing a negative shock to the market and prompting bond investors to sell their bonds . "

Freddie Mac's archives show us how 30 year fixed rate mortgages (FRMs) reacted to this announcement:

April 2013 – 3.25% May 2013 (announcement of the rejuvenation) – 3.54% June – 4.07% July – 4.37% August – 4.46% Sept. – 4.49%

For the remainder of the year, interest rates fell and rose slightly, closing the year at 4.46%.

Let's take the least sensational numbers we can and say that as a direct result of the announcement they rose from 3.54% to 4.07%.

Should history repeat itself in the coming months and start tapering in early November, 30-year FRM rates could approach 3.5% by the end of this year.

The Fed hopes history doesn't repeat itself this time. It says: "… the announcement in 2021 (an advance announcement in July) was in line with market expectations and the announcement in 2013 was earlier than expected."

Maybe. But in 2013 the climbs continued after the initial shock. And mortgage rates didn't fall to their pre-announcement level until 2016.

If history repeats itself in the coming months and tapering begins in early November, rates for 30-year FRMs could approach 3.5% by the end of this year and 4% by March or April 2022.

Find Your Lowest Mortgage Rate Before Rates Go Up (September 23, 2021)

Prices could rise as early as October

The next Fed meeting will take place in early November. But mortgage rates could rise sooner for two reasons.

First there is the report on the employment situation from October 8th. We already mentioned how the tapering could effectively make a certainty. And that could lead investors to pretend a formal announcement has already been made.

But there is a second threat to low mortgage rates that has nothing to do with the Federal Reserve.

And that's the debt limit.

Congress could not raise that cap until mid-October, when the Treasury Secretary expects the federal government to run out of money.

In this case, we are threatened with a government shutdown. But more seriously, the United States could default on its debt payments. And that's something that has never happened before.

What does the debt ceiling have to do with mortgage rates?

Well, CNBC reports that "the demand for US Treasuries could decline once they are no longer viewed as a reliable, safe investment … That would, in turn, drive up other borrowing costs, including credit cards, auto loans, and mortgage rates."

The chances are good that the legislature will come to its senses by then. But marginalizing it yourself can be seriously damaging. Because the last time the debt ceiling was not raised in 2011, America's creditworthiness was damaged and interest rates rose as a result.

Note that these consequences did not occur because America was insolvent. It didn't. They happened because the risk of default looked more likely than anyone had ever dreamed of.

The refi window could close

The bottom line for home buyers and homeowners looking to refinance is that today's low mortgage rates may not last long.

If mortgage rates react as most expected to the November 3rd Fed meeting, we could say goodbye to the current era of “near record low rates”.

Of course, economic forecasts are not always correct – not even close. And it is possible that none of this will happen.

But it's hard to remember a time when mortgage rates looked even dire. And many experts believe they see a mortgage refinancing window that is likely to close.

So, if you're looking to refinance and haven't set an interest rate yet, it may be time to do it in earnest.

Confirm your new price (September 23, 2021)

Related Articles