U.S. Mortgage Rates Fall on $600 Billion Fed Plan

U.S. mortgage rates fell more than three-quarters of a percentage point today after the Federal Reserve said it will buy as much as $600 billion of debt.
By: Kathleen M. Howley: Bloomberg.com
The average U.S. rate for a 30-year fixed mortgage ended the day at about 5.5 percent after falling to as low as 5.25 percent, according to Bankrate Inc. It was 6.38 percent this morning, North Palm Beach, Florida-based Bankrate said, based on a wider sampling than the so-called overnight rate published on its Web site.

The Fed said it will purchase mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, a government agency that insures bonds. Today’s lower rates indicate the central bankers may have achieved their goal of bringing liquidity to mortgage markets, said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker.

“These are not the assets that have caused all the trouble - these are quality mortgages that have been orphaned because investors have been reluctant to part with cash,” Soss said in an interview. “The government stepping in to buy them up may hasten the day when we finally find a bottom in housing.”

The central bank pledged to purchase up to $500 billion in so- called agency debt as well as up to $100 billion in direct debt of Fannie Mae and Freddie Mac, the world’s two largest mortgage buyers, and Federal Home Loan Banks.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said in the announcement it posted on its Web site.

Fannie and Freddie have about $1.7 trillion of corporate debt outstanding and $4.1 trillion of mortgage-backed securities.

“You’ll see a pickup in demand for housing,” said Bob Walters, chief economist of Quicken Loans in Livonia, Michigan. “We should see interest rates stay at these levels and maybe drop a little bit.”