Using the Fed Mortgage Backed Security Purchase Program to Predict Interest Rates

Fannie Mae and Freddie Mac sell mortgage backed securities that pay 4%, 4.5%, 5%, 5.5% and so on. If you read the previous post, you will notice that the investor that purchases mortgage backed securities gets paid about 0.75% to 1% less than the interest rate that is charged to the home owner.

In other words, an investor that owns a 5% mortgage backed security owns a group of mortgages that have interest rates of about 5.75% to 6%.

Furthermore, when the Fed purchases a large portion of 5% mortgage backed securities they are attempting to manipulate mortgage interest rates to be about 5.75% to 6%. For this reason, we watch which mortgage backed securities the Fed is purchasing in order to predict the future of interest rates.

Right now, this is exactly what the Fed is doing. They are buying 5% mortgage backed security coupons. This is why we expect mortgage interest rates to be in the upper 5s by the end of the year.

This is just one factor that is used to determine mortgage interest rates at this time, but this technique has proven to be pretty reliable this year.

By the way, I do understand that this is all pretty boring to most people. I also understand that there is a good chance that you are more confused after reading my explanation than you were before reading my post. Finally, I am quite certain that most people did not make it this far in their reading of this post.