Fed's move may help reverse slight uptick in mortgage rates

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Despite all the measures the Federal Reserve took last week taking to lower short-term rates and counteract the coronavirus' impact, the average mortgage rate tracked by Freddie Mac inched up.

But the Fed on Sunday night added a form of economic stimulus to its short-term rate cuts that directly supports the market for mortgage-backed securities. It should help counteract a relative slump in MBS that contributed to last week's rate increase.

However, the Fed's plan to increased investments in MBS and agency debt in upcoming months is still no guarantee mortgage-rates will be lower this week.

"The direction mortgage rates are going to go is a little convoluted right now," said Ruben Gonzalez, chief economist at Keller Williams. Spreads between average weekly interest rates on Freddie's 30-year fixed-rate mortgages and 10-year constant maturity Treasury yields have widened, he noted.

That's because there are factors at play beyond MBS prices when it comes to the rates consumers will pay for home loans.

Among other things, lenders consider capacity when setting primary market rates. Even before the virus hit, lenders struggled keeping up with demand, so average rates rose in part last week due to defensive pricing to control incoming volume.

That said, the Fed's plan generally appears to go a long way toward improving the outlook for secondary-mortgage markets.

"By supplying that liquidity to the market, mortgage spreads should tighten versus Treasuries, and borrowers should in turn begin to see lower mortgage rates. It also means levered investors like mortgage [real estate investment trusts] and banks could manage their risk more prudently, which should also help in reducing the potential for broader capital markets volatility," analysts at Keefe, Bruyette & Woods said in a report Monday.

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