We all make plans. In fact just today you likely made a plan that went something like. Get up, get to the office, check email, knock out my list etc. Then the real world starts to happen. Kids wake up sick, traffic is tied up unusually and excessively or you can’t lose someone whose idea of brief morning chit chat takes up fifteen minutes. Then the plan is out the window and your chasing. It will be interesting to see if the Federal Reserve’s plan for the mortgage market holds.
They have spent the better part of a year and a half planning this exit. Keep rates down, buy mortgage backed securities, refinance as many “good” borrowers as possible and work in a tax credit for buyers. All were part of the mix. Now it is time to execute the exit plan.
This exit can generate one of two results. Result one is that the market can live without the support. Rates will continue to rise. In fact they are likely to end up over six percent again, rather than five. However, a recovering market is able to stomach higher rates and houses still sell and mortgages get finances and no more job losses due to a slowing economy. Everyone recovers and the actions of the last few months by the Fed are seen as heroic.
The second result is no good for the market. Without the support of the market rates rise. Refinancing stops, home purchases slow dramatically because they are far more expensive. Then the economy slows and more foreclosures hit. After that rates rise further because the private (not supported by the Fed) market demands a further risk premium for making mortgages. The economy is tipped further into the danger zone because housing takes another beating on top of the one we already have. Then the actions of the Fed in pulling out of the market are seen as damaging, ignorant and imprudent.
Which will it be? The author has no idea. However, the best and worst case scenarios have been described. Now what happens is anyone’s best guess. However, the truth is likely between the two extremes.
