I recently reported that the Federal Reserve was pulling out of the mortgage backed security (MBS) market once and for all at the end of March. The Fed announced last month that it will no longer buy billions of MBS’s and my prediction at the time was that it would send interest rates soaring. I also predicted that it would cause a lot of turmoil on Wall Street. Well, it now looks like the Fed is also warning banks of tumultuous loan times ahead.
WSJ:
The Federal Reserve’s number-two official issued a stern warning to investors, banks and other financial institutions Friday: Don’t be complacent, interest rates are going up at some point and it will cause new market turmoil if you’re not prepared.
“We are in uncharted waters for monetary policy and the financial markets,” Donald Kohn, vice chairman of the Federal Reserve, said in a speech to bankers at the Federal Deposit Insurance Corporation. Rattling off a long list of uncertainties about the outlook – a rising budget deficit, foreign demand for U.S. debt, the strength of the recovery – Mr. Kohn said bankers need to start preparing now for the risk that interest rates could move swiftly in unexpected directions, most likely up.
Here is my article from two weeks ago and a quote - Operation Mortgage Kill:
It appears that most of you in real estate/mortgage la la land do not comprehend the significance of this move by the Fed. Corporate media is only glossing over this devastating news as so called mortgage experts have not even realized that this is the biggest piece of mortgage news in several months. The US Real Estate Titanic is going down right now as many obliviously party and watch the band on the deck.
Why such gloom and doom?
The Federal Reserves program to buy billions of Mortgage Backed Securities (MBS) from Fannie Mae and Freddie Mac will officially end in March. The ripple effects that this will have on real estate, mortgages and on the market for government bonds will be absolutely devastating to the US economy.Once the Fed stops buying mortgage-backed securities at the end of March, it will be up to the private market participants to buy these risky MBS. They will be the only ones left to prop up a rapidly failing real estate and mortgage market. Uncle Fed will no longer be the markets keeper (or should I say sucker) like it has been for economy safe keeping since the crisis began three years ago.
As the Fed pulls out from purchasing MBS, we should see mortgage interest rates rise significantly through spring. Home purchases will plummet and many, many of the remaining players involved in the real estate or mortgage business will fall like dominoes.
