Fed's To Continue To Keep Mortgage Rates Low

Last week, Federal Reserve Chief Ben Bernanke testified before the House Financial Services Committee at which time he defended the Federal Reserve's policies of keeping interest rates low. According to his statement, these policies are supporting a weak economy that continues to have a high unemployment rate. Through the purchase of $85 million per month in Treasuries and mortgage bonds, the Fed's will continue to keep mortgage rates low in an effort to further strengthen the housing market and eventually the economy. While acknowledging the risks involved in keeping rates low, Bernanke also stated that this action has helped create many private sector jobs; people are able to purchase homes and refinance at very low mortgage rates, as well as, obtain car loans at low rates. This week, Janet Yellon, the Federal Reserve's vice chair, expressed her support for the Fed's bond purchases because the economy is operating well below its full potential. Neither Bernanke and Yellon gave indication as to when the Fed's monetary easing policy would end, but rather that bond buying should continue well into the recovery and until there is a substantial improvement in the jobs market.

Results of the Fed's actions can be seen in recent housing reports that show a recovery in progress. The Commerce Department reported recently that new home sales surged in January to the highest level in 4 1/2 years. Sales of new single family homes were up 15.6% to a seasonally adjusted 437,000 annual rate which is the highest since July 2008 and was the largest gain since April 1993. When compared to January 2012, this is a 28.9% increase.

The S&P/Case Shiller composite index of 20 metropolitan areas showed that home prices increased 6.8% last year from 2011 numbers, the biggest gain in more than six years. The index increased 0.9% in December on a seasonally adjusted basis. The increase in home prices across the country is due to low inventory. This increase in value is very much needed by existing homeowners, especially those who are underwater. Many homeowners who have Fannie Mae and Freddie Mac loans that were sold to the GSEs prior to June 1, 2009 have used HARP refinances, which often do not require an appraisal, to refinance underwater mortgages. These homeowners, especially those who shortened the term of their loan, are gaining equity back at a faster pace than expected since home prices are rising. The same can be said for those homeowners who used the FHA streamline loan to refinance, another means of moving to a better loan without the need of an appraisal. Many homeowners who have FHA loans that were endorsed prior to June 1, 2009 have taken advantage of the reduced upfront and annual mortgage insurance fees that are being offered through the FHA streamline until the end of 2013. Both of these government programs are helping eligible homeowners both refinance to lower mortgage rates, as well as, gain back equity in their homes.

With these efforts and the current increase in home prices, it is hoped that inventory of homes for sale will return to normal as the home buying season approaches. While this may slow the rapid increase in values, a return to normal is needed in order to prevent another housing bubble in the near future.

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