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Low Rates Keep Borrowers Happy but Cause Concern for the Fed

Couple celebrating home sale
Mortgage interest rates continued a two-week decline which created a positive stimulus for borrowers but conversely reduced any possibility for the Fed bond purchase program to decrease.

Rate reports provided by loans.org show that all three primary mortgage interest rates decreased slightly for the week ending Oct. 31, 2013. The 30-year fixed-rate mortgage dropped from 3.99 percent last week to this week’s average of 3.94 percent.

The 15-year FRM averaged 3.0 percent, a decline from 3.03 percent reported last week.

The final rate, the 5/1 adjustable-rate mortgage, decreased minimally as well. The rate shifted downward from 2.74 percent to 2.72 this week.

The rates quoted are heavily influenced by both Freddie Mac and Fannie Mae, according to Jordan Roth, senior branch manager for the Manhattan office of GFI Mortgage Bankers Inc. He said a number of lenders are moving in and filling a void left by the lending giants. Instead of using automated underwriting, which looks heavily at income, credit score and assets, “common sense underwriting” looks at the entire transaction.

Another factor that has impacted the market is the uncertainty and indecision by the Federal Reserve Bank of New York. So far, mortgage interest rates from the second half of 2013 have been heavily influenced by the activity of the Fed, creating both drastic and swift fluctuations in both directions based on committee announcements.

Roth said this current consistent two-week drop in mortgage interest rates is obviously positive, but the economy is not moving on the right track for major changes by the Fed.

Yesterday the bank found that a slow housing recovery and elevated unemployment rates would force it to keep the bond purchasing program alive. A committee meeting announcement was released stating:

“Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy.”

But the Fed stated that more improvement needs to occur before they can reduce purchasing  $40 billion per month of mortgage-backed securities and $45 billion per month of Treasury securities.

Several economists predict that it will take until Q2 or Q3 2014 before any program reductions are made. Additionally, Roth said that one of the two programs will likely reduce before the other. He believes the Fed will slow down the $45 billion Treasury purchase program before they reduce the mortgage-backed securities program. This method will keep mortgage interest rates low for consumers.

Regardless of what occurs, the Fed will likely proceed with more caution than exerted during the summer of 2013. The striking increase in the 30-year FRM shook the housing market as a reaction to the Fed’s announcement.

Roth does not think this will happen again.

“The Fed may have learned from their mistake,” he said.