TexasWaterFrontRanches

The Fed reiterated last week that in March of 2010, they will be ending their Mortgage Security Buyback program, a big part of what has kept interest rates low throughout 2009. It won’t be a sudden drop-off, rather a slow decrease in these purchases until March, when there will be no more.

With the Fed no longer spending the tens of billions of dollars monthly on mortgage securities, we will only have the private sector to fill in the gap. When that happens, we can naturally expect mortgage rates to rise. “The difference in monthly mortgage payments of 5% or 6% can be measured in tens of thousands of dollars over the life of a loan,” one writer explains.

The Atlantic Monthly writes that the credit markets need securitization, and warns that it will only become more difficult to borrow money (and those loans will come at higher interest rates) as the Fed program ends. “If you think banks aren’t lending enough now, then you’d find a world with no securitization much worse. Yet, that might be what you get if the Fed ends its program.”

Why would the Fed remove such a successful program? The analogy of a bike with training wheels is often given – if you want an economy to strengthen, recover and stand on its own, at some point you need to take the wheels off. If the Fed keeps rates too low for too long, inflation will rise higher and you will expect to see rates rise anyway. Home loan rates will increase as demand is met, naturally, with or without the Fed.

We can expect the end of the first quarter of 2010 to be a telling time for the economy’s recovery, but the heavy favor of the buyer and borrower is going to change. These will be some of the last months we’ll see that are such great markets for buying a home or land. If you are considering buying, you should begin your search now.