The Federal Reserve has so far spent about $250 billion on low-interest mortgages acquired from lenders by Fannie Mae and Freddie Mac.
The purchases, which could eventually top $1 trillion, are one part of the financial buyout many people understand and support. This spending has driven mortgage rates to record lows, encouraged people to buy houses, and helped many people refinance out of lousy mortgages.
It all looks good on paper, but some economists are warning others about some risks. Here are a few of their concerns:
● The Fed is creating new money to pay for this, which will eventually encourage inflation.
● When the Fed stops buying, rates will increase quickly and substantially.
● Not too many investors are interested in the low-yielding mortgages, so it is likely taxpayers will have to foot the bill.
Source: The Wall Street Journal, Peter Eavis (04/02/2009)
Mortgage interest rates are likely to fall as a result of the Federal Reserve’s plan announced Wednesday to buy up $300 billion in Treasuries and increase purchases of mortgage-backed bonds, economists say.
The Fed’s program attempts to reduce the supply of outstanding mortgage bonds, boost the price of the remaining bonds and lower their yields. This allows banks to reduce rates for new mortgages and still make money.
Prior to this announcement the spread between 30-year fixed mortgages and 10-year Treasuries was 2.1 percent, higher than the average of 1.75 percentage points during the 10 years before the subprime mortgage collapse, according to Bloomberg’s calculations.
Putting people back to work is the next challenge facing the Obama administration. Even record low mortgage rates won’t stimulate home sales if consumers don’t have jobs. The jobless rate was 8.1 percent in February, according to the U.S. Labor Department.
Source: Bloomberg, Brian Louis (03/19/2009)
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