The Federal Reserve has announced their intention to stop buying mortgage backed assets. The housing recovery is far from over, but the government believes that it is time to back off their aggressive stance to help stimulate the real estate market. Since the end of 2008, the Federal Reserve has been buying home loan securities and bundling the mortgages that are used to fund mortgage lending. In March, the Fed plans to complete its purchase of $1.25 trillion in mortgages, even though signs of a housing stability are nowhere to be found.  

Most mortgage insiders have concluded that higher mortgage rates are on the horizon. But even if the Fed holds onto the mortgage loans it has already purchased, the act of no longer buying additional home mortgages is likely to increase mortgage rates in the coming weeks. Experts say a jump of at least a quarter to a half percentage point is likely.  Mortgage refinancing activity continues to decline and home loan defaults have been reported at record levels.

San Francisco Federal Reserve President Janet Yellen warned of higher rates in a speech Monday. Fed Chairman Ben Bernanke is likely to take questions about the Fed’s mortgage program when he testifies about economic conditions on Capitol Hill Wednesday and Thursday.

The spread between the interest on 30-year fixed rate home loans and the benchmark 10-year Treasury note now stands at about 1.2 percentage points. Before the financial crisis, this spread was typically closer to 1.5 percentage points

To obtain the 30-year fixed-rate mortgage under 5%, borrowers would be required to pay an average 1.50 points.  The 5/1 ARM looks good as borrowers can lock in at 4.25% with no points.