The Federal Reserve's unexpected decision to maintain its current bond-buying program spells good news for mortgage volumes over the near term, according to Fitch Ratings.
In recent months, mortgage rates have increased significantly in response to concerns over the central bank beginning to wind down its monthly $85 billion purchases.
For instance, average fixed-mortgage rates moved lower this week, amid signs of a weakening economic recovery — prompting the Fed to continue its quantitative easing program.
The 30-year, fixed-rate mortgage averaged 4.5%, down from 4.57% last week, but up from 3.49% a year earlier, according to Freddie Mac.
"The rise in rates had also begun to weigh on mortgage application volume with a sharp decline in refinancing activity," said Fitch Ratings managing director Rui Pereira.
He added, "We believe yesterday’s Fed announcement will reverse some of these recent trends. We expect mortgage interest rates to decline and give a short-term boost to mortgage volume as borrowers look to take advantage of the temporary reprieve."
Additionally, Treasurys traded nearly flat on Thursday, leveling out after a jump in the previous session among the Fed’s commitment to agency mortgage-backed securities.
Consequently, when Treasurys drop or widen, mortgage rates historically have followed, given all the volatility in the market.
Yields from benchmark 10-year notes have jumped more than 100 basis points from 1.6% at the beginning of May, when Fed chairman Ben Bernanke first signaled a timeline for beginning QE tapering.
Going forward, the problem will be how the Fed will communicate its intention to taper the next time without causing mortgage rates to rise once again.
"It’s a Catch-22," explained BlackRock (BLK) managing director Jeff Rosenberg.
He continued, "Creating tighter financial market conditions — higher mortgage and interest rates and lower stock markets – are the very things that the Fed cited for Wednesday’s decision to not taper. And the Fed may have backed itself into a corner."
Some mortgage experts believe the Fed could’ve gotten away with tapering between $10 billion to $15 billion since mortgage-backed securities issuances are down roughly $20 billion since June.
"Lower interest rates undeniably boost buyer interest and affordability," explained The Collingwood Group partner and managing director Tim Rood.
He added, "You can rarely pick the bottom of a housing market but locking in 3%-4% mortgages for 30 years is a once in a lifetime phenomenon. Regarding refinances, there were surely some qualified applicants that missed the window to refinance before the recent uptick in rates."
Put simply, continued quantitative easing could lower rates, which would have a modest short-term impact on lending volumes.
On a similar note, a short-term boost in mortgage volume may also result in a modest increase in residential mortgage-backed securities volume later this year, the credits rating agency concluded.
