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Chrisman's Corner: What Does It Mean that the Fed Stopped Buying Mortgages?

Answer: Not much.

Quantitative Easing has been with us since 2008, and since then the Federal Reserve has been purchasing fixed rate securities (Treasury securities and securities backed by mortgages) to pump money into the economy to stabilize the markets and reduce panic in the markets and to lower interest rates to spur on the economy. The first program was not enough so the Fed rolled out QE2 and then QE3 in 2011 and 2012. Again the expectation was to keep mortgage rates and other borrowing rates low for consumers and companies. 

 As soon as QE3 started speculation started as to when the Fed would end its purchasing program and the word "taper" entered the vernacular of financial markets. Tapering was the expected move of the Fed to end QE3, instead of immediately stopping the purchase of $85 billion in securities every month the Fed would slowly taper off its purchases until out of the market. Tapering finally began in December 2013 and has officially ended.

Our brokers know that the primary purpose of QE was low interest rates for businesses and consumers to spur the housing markets, the economy and employment. Sure enough, rates have been low. But rates have been low all last year and this year, even with tapering and now the cessation of QE in the market. This is very good news for the mortgage markets in the short, and possibly longer term, as it shows that institutional and private investors have filled in the slack in the demand for Mortgage Backed Securities as the Fed has slowly left the market. It also means that investors do not have a significantly positive view of economic growth in the near term.

Now that it has ended we can watch “true markets” return. JMAC’s management expects an increase in volatility, but we can also expect rates to be determined to a greater degree by private sources rather than government intervention.