The Fed Chairman Bernanke is speaking to Congress this morning, and so far the outstanding highlights are, paraphrasing:
Fed continues to expect conditions to warrant exceptionally low rates for extended period will continue to evaluate purchases of securities in light of evolving outlook as expansion matures, Fed will at some point need to begin to tighten monetary conditions.
A lot of speculation has swirled around:
A. What will mortgage rates do when (or if) the Fed does stop buying Mortgage Backed Securities (MBS) at the end of March, 2010? Will other buyers step in to buy the MBS and rates find stability, or, as many more industry insiders expect, will rates necessarily rise precipitously in order to attract new buyers?
and
B. Will the Fed suddenly announce that they will continue their MBS buying program, in order to aid the housing market and not let all the money ($1.25 Trillion) that they have thrown at the housing market via MBS purchases to date go to waste, letting the housing market deteriorate further.
Based on the comment above from Chairman Bernanke, I feel more and more like the Fed will suddenly announce, toward the end of March, that they will continue to purchase MBS into the foreseeable future.
Nothing is certain, so if you are ready to lock a rate, the sure thing is to lock and be certain.
And, if the Fed does buy MBS into the foreseeable future, with who knows how much more taxpayer money, then that begs the question: Is that the best use of taxpayer funds for the good of our country?
There, I am divided. First, buying right, meaning buying newly originated MBS under the current strict underwriting guidelines, will eventually make a profit for the country. We will get a positive return, over time, on that investment. (A lot of evidence suggests that we are NOT buying just the clean, newly originated mortgages, but rather the ‘toxic’, non-performing loans.)
On the other hand, even if we do buy just the good mortgage loans that have the highest probability of performing – there is a lot to be said for simply letting the market take its own course, and let the pain of failure be sharp, direct and deep – but short-lived.
Are we just kicking the problem down the road, to be exacerbated in a worse way some months or short years later?
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