Mortgage rates have fallen back to record lows on word that the Federal Reserve plans to pump nearly $2 trillion into U.S. mortgage- and Treasury-bond markets.
Home-loan rates dropped below 5 percent yesterday after the Fed announced plans to buy $1.75 trillion of mortgage bonds, U.S. Treasuries and other securities on open markets. The central bank had previously disclosed plans to purchase $600 billion of such debt.
By snapping up huge amounts of mortgage and Treasury bonds, the Fed will make hundreds of billions of extra dollars available for fresh home loans.
That prospect pushed benchmark mortgage rates down about 0.25 points yesterday to 4.875 percent - tying a record low set in January, according to local loan brokers.
Boston lender John Battaglia thinks rates could drop another eighth of a point today, but cautioned that market watchers “are still trying to determine whether this is a blip or a long-term move downward.”
However, Bankrate.com analyst Greg McBride believes the Fed’s actions will keep rates low for the rest of 2009 - good news for the struggling housing sector.
“Low mortgage rates should help bring home buyers off of the sidelines and into the marketplace,” he said.
McBride believes the Fed’s move will especially cut rates for Boston-area home buyers seeking “jumbo” mortgages, or loans above $523,750. Jumbo rates had been running as high as 8.5 percent in recent weeks amid soft Wall Street demand for buying such loans from banks.
The Fed announced yesterday’s plan in conjunction with a decision to keep the benchmark federal funds rate unchanged at a record-low zero-to-0.25 percent range.
“Information received (since) January indicates that the economy continues to contract,” the central bank said in disclosing its moves. “Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending.”
Market watchers quickly endorsed the Fed’s actions.
“This will definitely lend a helping hand to Treasuries, mortgages (and other loans),” Bill Gross of bond-investing giant Pimco told CNBC. “It is a significant move.”
The U.S. central bank doesn’t usually purchase investments such as mortgage or Treasury bonds.
But the Fed must take unusual steps these days because it’s already used up its traditional economic tool: Cutting the federal funds rate.
The federal funds rate can’t go below zero percent, so there’s no room left for the central bank to cut the key rate any further.
Yesterday’s announcement sent the Dow Jones industrial average briefly rallying.
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