The Federal Reserve recently confirmed that it will no longer make open market purchases of mortgage backed securities
after March 31st, and underwater homeowners are definitely going to miss that money. This particular Fed program was one of a number of extraordinary, emergency measures
meant to reverse the near meltdown of the U.S. financial system, and through it the Fed pumped nearly $1.25 trillion into the mortgage backed securities market over the past twelve months.
The program was officially intended to lower home-loan mortgage rates, and that's exactly what it did. Brian Sack, head of the NY Fed's money market desk, estimated that it lowered rates on agency mortgage backed securities by a full point, and that a separate program targeting government securities lowered rates on the 10 year Treasury by at least half a point. Home mortgage rates dutifully followed suit, dropping from almost 6% to below 4.5% today:
[Related -Two Picks to Play Defense in a Slowing Economy]
When this unprecedented government market manipulation comes to an end, and it is coming to an end now, single family mortgage rates will go right back to where they came from. As that happens home ownership will become even less affordable, and that also means home prices are likely to drop even further.
But there's much more….
[Related -US Jobless Claims Fall, Moving Closer To Multi-Decade Low… Again]
As the Fed begins to unwind its historic intervention, it faces a second wave of toxic mortgage maturities that could be even more damaging than the last wave of subprime mortgages. These are the 3 and 5 year Option ARM mortgages, and they were the credit bubble's absolute creme de la creme.