Throughout 2009 the Federal save Board took unheard of actions to sustain the mortgage market by directly purchasing mortgage backed securities (MBS) in the open market, accumulating over $1.2 TRILLION by the time the program officially ended on March 31, 2010.
The price of the 4.5% MBS began to fall on March 24, 2010 in anticipation of the end of this program.
Market participants correctly observed that if the biggest buyer (The Fed) was no longer in the game that the need side of the supply-need equation would be reduced and consequently the prices would go lower which method that interest rates would go higher.
Most seasoned observers felt that the rates on 30 year fixed rate mortgages had been artificially held down by the Fed’s actions, and would consequently rise from under 5% to the 6-7% range once the Fed had exited the market. That began to occur as mortgage interest rates surged by half a percent in early April 2010 in the first three weeks following the end of the Fed’s 18 month participation in the market.
Then, on April 26th, the MBS market caught a bid, and the prices began to go back up. On April 27, they surged to the highest level since March 24th pushing mortgage interest rates back down.
The short answer to that is that a “flight to safely” began seriously due to an external event… the imminent default of the sovereign debt of Greece.
Greece is not the only European country facing financial challenges. The acronym “PIIGS” has been aptly coined to mirror the extreme financial difficulties facing Portugal, Ireland, Italy, Greece, and Spain. As the markets began to understand that the bonds of all of these countries (and many other countries around the world that have made financial commitments that they cannot possibly keep) were in danger of default, fixed rate investment money began to leave these markets seeking the relative safety of the United States.
The US bond market has been an immediate beneficiary of this “flight to safety”, with the provide on 10 year Treasury Notes falling from 3.8 to 3.62 on April 27th. And the 10 year Treasury observe is the unofficial “index” for provide on Mortgage Backed Securities.
What that method to homeowners, is that this permanent flight to safety has delayed the impact of the Fed’s exit from the mortgage market, consequently creating one last opportunity for locking in low rates on fixed rate mortgages.
The inner fundamentals here in the US have not changed. Government spending is nevertheless wildly out of control and the resulting deficits are nevertheless exerting upward pressure on interest rates. This low rate ecosystem cannot and will not last.
For anyone wishing to lock in low long term fixed rates, there is one more window of opportunity, but it may be very fleeting. In the not too distant future, we may look back on the Spring of 2010 as the last time that fixed mortgage rates were under 7%.