What We're Hearing

The Federal Reserve has pulled the switch and decided to end its $1.25 trillion Fannie Mae/Freddie Mac MBS purchase program. The deadline is March 31, 2010. The two most obvious questions: who will fill the MBS purchase void, and will mortgage rates rise? Let's put it this way: if few buyers pick up the Fed's slack, mortgage rates indeed will rise. After all, one way to attract investors to a bond is to hike the yield. Correct? If you hike the yield that means someone somewhere (the U.S. taxpayer) is going to pay more. Of course, the U.S. taxpayer will get hurt when the Treasury has to start hiking interest rates to pay for all that government spending that's being financed through Treasury bonds and notes. It stands to reason that with all this government borrowing going on the Fed will be in no hurry to hike short-term rates. (Hopefully Messrs. Bernanke and Geithner see eye to eye on this.) What does this mean for mortgage lenders? Answer: in theory, the spread between their costs of funds (deposits) and what they lend it out at (the rate charged to consumers) should continue to be wide for quite some time. And that means strong mortgage profits on newly funded loans. As for warehouse credit, we keep hearing anecdotal stories about more regional banks gingerly stepping into this business...