Mortgage interest rates have been falling over the past month back to the best levels of the year. This drop in mortgage rates has happened despite a strong rally in the stock market. Usually when stocks rally, mortgage rates get worse.
Many analysts think that the stock market is overbought and will sell off soon. If that were to happen then we could see mortgage rates move even lower. One thing working against mortgage rates is the Federal Reserve beginning to wind down their purchase of Mortgage Backed Securities (MBS). This program was started at the beginning of the year in an effort to tighten the spread on MBS and bring mortgage rates down. Originally the Fed was going to use $1.25 trillion dollars to buy mortgage backed securities by the end of this year. On Wednesday the Fed announced that instead of spending all $1.25 trillion by the end of this year, they would be slowing their daily purchases of MBS so that the funds are not gone until the end of March 2010. As the Fed buys less MBS each day in order to make the $1.25 trillion last longer and gradually exit the market, mortgage rates could begin to go up.
It is always hard to predict where mortgage rates are headed. In the current times it is even more difficult because of the unprecedented Fed involvement and the uncertainty about how much rates will increase up when the Fed exits the market.