Fed Pulls The Plug On Mortgage Purchases The Federal Reserve will stop buying mortgage-backed securities this week, ending a massive program that’s been helping the housing market recover. The Fed has bought more than $1.2 trillion of mortgage-backed securities in all.
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Fed Pulls The Plug On Mortgage Purchases

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Fed Pulls The Plug On Mortgage Purchases

Fed Pulls The Plug On Mortgage Purchases

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Over the past year, the U.S. financial system has been on life support. But as the patient recovers, the government is gradually starting to remove the IVs to see if the economy can stand on its own two feet. On Wednesday, the Federal Reserve will be ending one massive program that's been helping the housing market. It's going to stop buying pools of home mortgages.

NPR's Chris Arnold reports.

CHRIS ARNOLD: In the wake of the financial crisis a year and a half ago, the government wanted to drive down interest rates for homeowners. They wanted to stimulate the economy by making it cheaper to buy or refinance a house. But there was a problem: Hardly any banks or other investors out there were eager to lend money for home mortgages, even to people with decent credit. And that was driving up interest rates.

Mr. GUY CECALA (CEO/Publisher, Inside Mortgage Finance): You know, the subprime mess put really a skull and crossbones on all mortgage-backed securities.

ARNOLD: That's Guy Cecala, the publisher of Inside Mortgage Finance. He says mortgages are bundled together and then get bought and sold. But back then, you had everybody selling and hardly anybody buying, which was not good. So the Federal Reserve decided to come to the rescue. The government itself actually started buying up mortgages, a lot of mortgages.

Mr. CECALA: In fact, according to the numbers we track, as of last week, the Fed and Treasury together became the largest mortgage-backed security investor in the world.

ARNOLD: And it worked. The government drove down interest rates for millions of homeowners and that helped the economy.

But by now, the Fed has bought a colossal amount, upwards of $1.2 trillion worth of home mortgages.

Barry Habib runs Mortgage Success Source, which tracks rates and trends for mortgage brokers. He says if you stacked $100 bills on top of each other...

Mr. BARRY HABIB (Chairman, Mortgage Success Source): A hundred thousand dollars is only a stack four inches high. A million dollars is 40 inches high, three feet off the ground. But a trillion, a trillion is a stack 679 miles high. So just to give you an idea of how enormous the Fed buying is and that's ending, that's stopping.

ARNOLD: Habib thinks that that will leave a vacuum in the market and it'll push up interest rates.

But since the start of this year, the government has been slowing its purchases of home loans, and the private sector has been recovering and stepping in to make up the difference. The Fed was buying 90 percent of new mortgage-backed securities, and lately, it's been buying just about 30 percent or less. And as the month ends, it'll stop buying altogether.

So the question is what happens then?

Mr. PAUL VAN WART (Mortgage Broker): Yeah. Okay. Well, I mean, if I get the lock-in, am I good for the month of April?

Unidentified Man: Yeah...

ARNOLD: Paul Van Wart is a mortgage broker outside Boston. He says rates have been jumping around a little bit recently. But overall, he says rates are still near historic lows, and he's been seeing that boosting his business and the housing market.

Mr. VAN WART: You know, rates have been fantastic. I mean, you know, the market's definitely turned for the better.

ARNOLD: Van Wart's hoping that that's not going to change when the Fed stops buying up so many mortgages. And some top investors think that everything is actually going to be okay here.

Scott Simon oversees mortgage-backed securities investments at PIMCO -it's a big, well-respected investment management firm. Simon says rates might move up a little bit - maybe just a tenth of a percent or so when the Fed pulls the plug.

Mr. SCOTT SIMON (Managing Director, PIMCO): It won't be a perfect landing, but there are people who are saying mortgage rates are going to go up by a half or one percent, basically, now. And we think that is crazy.

ARNOLD: Barry Habib thinks that rates could rise more. And he says anyone who hasn't refinanced their home yet should consider doing so very soon.

Either way, Scott Simon says this program by the Fed to buy up mortgages has so far been very important for the economy.

Mr. HABIB: The reason you get to still live indoors is because the Fed came to the rescue.

ARNOLD: What do you mean the reason people still get to live indoors?

Mr. HABIB: If they hadn't done this, the housing market would have imploded. You would have had unemployment, foreclosures that look nothing like the foreclosures we have now. They would have been so large. And we could have had the depression. For the homeowner, I think they really did save the day.

ARNOLD: As far as cost, so far the government's actually been making quite a bit of money on this program. As those homeowners pay interest on all those loans that the government owns, that's earning the U.S. Treasury upwards of $50 billion a year.

Chris Arnold, NPR News.

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