The Fed reiterated once again that their Mortgage Backed Security (MBS) purchase program…the program that has helped keep home loan rates low for much of the last year…will end on March 31, 2010 as previously stated. Here’s the lowdown on what this means, and all the latest news impacting home loan rates and the markets.

Last Wednesday during their regularly scheduled meeting of the Federal Open Market Committee, the Federal Reserve kept the Fed Funds Rate unchanged. But history has shown that when the Fed has left rates too low for an extended period of time, there is a price to be paid, via higher inflation. Yet if the accommodation is removed too early, it can derail an already fragile recovery. The Fed continues to walk this tightrope, trying to get it “just right.”

Along with this decision, the Fed emphasized and reminded that their MBS purchase program will still end on their already revised deadline date of March 31, 2010. Why is this significant? Let’s look at the numbers from last week to get an idea. The Fed purchased $16B in MBS in the latest week bringing the year-to-date total to $1.087T. This means there is $163B left to purchase before March 31, which in turn means the Fed will purchase about $11.5B on average each week through the end of the buying program. This is less than half of what the Fed was buying regularly throughout 2009 and a 1/3 less than what the Fed has been buying in recent weeks.

So why does this point to higher rates around the corner? When there is lots of supply and diminishing demand, the price of that item will subsequently go down – it’s Economics 101. So, when Bond prices start to decrease from the diminishing demand of the Fed’s purchases, home loan rates will naturally be likely to increase.

Many of you may have seen the article in today’s Mercury News Real Estate section addressing the take over of Fannie Mae and Freddie Mac and how that’s affecting interest rates. I am including a clip from it here just in case you missed it:

Fannie Mae, Freddie Mac takeover causes mortgage rates to tumble

ONE-DAY DECLINE IN COST OF A MORTGAGE ‘INCREDIBLE’; HOUSING PESSIMISM WANES

By Steve Johnson
Mercury News

Article Launched: 09/09/2008 07:38:22 AM PDT

The federal government’s takeover of Fannie Mae and Freddie Mac sent mortgage rates tumbling in California, raising hopes that the state’s severely ailing housing market will get a boost.

After the federal action Sunday, consumers with outstanding credit Monday were offered rates as low as 5.375 percent on 30-year fixed mortgages, said Cathy Warshawsky, president of the Silicon Valley chapter of the California Association of Mortgage Brokers. That was down nearly a full percentage point “” a difference that would amount to more than a $200 decrease in monthly payments on a $400,000 loan.

“It’s been absolutely incredible,” Warshawsky said. “None of us expected this to happen. That ought to give people some serious hope.”

As always, I’m curious what you think. Will the lower rate motivate people to buy in the final 3.5 months of the year? And does the soon-to-expire upper limit of $729,750 on conforming loans play into that decision?

I’d appreciate it if you could contact me and let me know how these developments make you feel about the housing market so I can better serve you and my current and future clients.

Please be aware that I am watching this very closely on a daily basis and will be blogging it about it regularly so be sure to subscribe to my blog. The link is on the right or above.

Thanks!