Interest rates for mortgages over the last 6 months have been amazing. Most borrowers have been able to get rates in the low 5% without paying any points or high 4% if they wanted to pay some points. There is a lot of speculation in the market right now about what is going to happen with rates. There are really only two arguments, rates are going to go up or rates are going to stay the same. Here is the basis of both of these arguments.
Rates are going to go up:
Rates have been kept artificially low over the last year. The government has been investing billions if not trillions of dollars into the purchase of mortgage backed securities. The government has only committed to buying mortgage backed securities through the end of the first quarter of 2010. This news raised a lot of chaos in the market toward the end of last year. Rates stepped up about a half of a percent on this news. The government cannot continue to keep purchasing more and more of these securities. If they do, the value of the dollar will continue to go down as well as the risk of another housing bubble.
Rates are going to stay the same:
The government has spent the better part of two years attempting to stabilize the housing market. The most successful aspect of this effort has been the purchasing of mortgage backed securities to keep interest rates low. If the government stops buying these mortgage backed securities, who will be there to buy them? The market has not shown a strong appetite for these securities since they first crashed a few years ago. The only reason that banks are still writing new mortgages is because there is someone buying them on the secondary market. If the secondary markets disappears, the banks will all but shut down the market. The government showed the big banks that they would not let them fail and the banks know they hold all the cards. Until a new investor shows up in the secondary market, that wants to buy mortgage backed securities, the US Government is going to be obligated to keep buying them. Failure to do so would result in another crash of the housing market.
