Real Estate

Mortgage rates likely to fall again after the Fed's latest dramatic response to coronavirus

Key Points
  • Mortgage rates are primed to fall again after the Federal Reserve's latest dramatic policy moves to combat the economic impact from the deadly coronavirus pandemic.
  • The Fed on Sunday said it will begin buying $200 billion of mortgage-backed bonds, a move that will stabilize and likely lower mortgage rates, which moved sharply higher last week.
  • Mortgage rates had fallen to a record low two weeks ago, but a flood of refinance applications overwhelmed lenders and caused investors in mortgage-backed bonds to back off.
A real estate agent, left, talks to potential homebuyers during an open house in the 16th Street Heights neighborhood of Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images

Mortgage rates are primed to fall again after the Federal Reserve's latest dramatic policy moves to combat the economic impact from the deadly coronavirus pandemic.

The Fed on Sunday said it will begin buying $200 billion of mortgage-backed bonds, a move that will stabilize and likely lower mortgage rates, which moved sharply higher last week. This is part of a brand new, $700 billion round of quantitative easing in response to the COVID-19 crisis. The central bank also slashed rates to zero.

Mortgage rates had fallen to a record low two weeks ago, but a flood of refinance applications overwhelmed lenders and caused investors in mortgage-backed bonds to back off. That, in turn, caused mortgage rates to jump more than 50 basis points in one day and hit their January high by the end of last week. The Fed's move will likely reverse that course yet again.

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"It will help prevent MBS spreads from widening further to Treasury yields.  It will keep mortgage rates in a happier zone under 4%.  It will pave the way to a return to or below 3% in the coming weeks," wrote Matthew Graham, chief operating officer at Mortgage News Daily.

Lower rates will help those stressed by temporary employment losses, although the government has so far not addressed the potential spike in mortgage delinquencies those losses could cause.

"As was done during the QE phase of the Great Recession, the Fed purchasing MBS should help cushion some of the blow to Americans by potentially lowering their mortgage payment or giving them an incentive to buy a home," said Dave Stevens, former CEO of the Mortgage Bankers Association and former commissioner of the FHA.

Homebuyers are rattled by the threats to both their health and wealth. Traffic was slow at open houses in the D.C. area Sunday, with real estate agents saying some offers they had been expecting last week never came through. Lower mortgage rates could help some, but homebuying has always been a very emotional process, as it is most consumers' single largest investment. 

"By acting swiftly to tamp rates down and pledging ongoing support, the Fed may have 'flattened the curve' in the housing market – diminishing some of the urgency households may have felt to buy or refinance now less they miss out and keeping demand strong further into the future," wrote Danielle Hale, chief economist at realtor.com. "However, the Fed is acting because the path ahead for the economy is uncertain, and the housing market could be impacted directly and indirectly."

The benefit to current homeowners from the Fed's move is much more immediate. 

"Today's dramatic action by the Fed, lowering rates to zero, buying Treasuries and MBS, and encouraging banks to go to the discount window, will significantly reduce stress in the system," said Mike Fratantoni, chief economist for the Mortgage Bankers Association. "MBA expects these actions will lower mortgage rates, helping homeowners save money through refinancing, and thereby providing a boost to the broader economy."