Government Purchase of Mortgage Backed Securities and Mortgage Rates

i heard that the government is slowly backing out of buying the mortgage back securities, and this will cause the mortgage rate to go up, right?

1 Answer

There is no single right or wrong answer here.  Essentially, it is all about supply and demand.  If there is little demand, then the supply is high.  And in order to reduce the supply, the prices are reduced to attract buyers.  The opposite is true as well and it does not matter what the product being sold is.

The government is a buyer of MBS [mortgage backed securities] right now and is creating demand in the market with each purchase. The more demand for the product, MBS in this case, means that discounts are not needed to attract buyers.  So, a smaller yield can be paid to these buyers and that results in lower mortgage rates.  A higher sale price means a lower yield when it comes to MBS.

When there are more sellers in the market, prices are reduced, which increases the yield or return to the investors.  When a higher yield is paid out, mortgage rates tend to follow.

The big question is this then:  If the government finishes its purchase program, will other investors be interested in the purchase of MBS?  Will it leave a hole in demand that will not be filled?  Will prices need to be reduced to attract investors?  And will that continue to be the case?  If there is a void left that is NOT filled by other investors, you can count on mortgage rates increasing as a result.  But the governemnt ceasing to purchase MBS will not be the cause.  The lack of appetite among all investors will be the cause.  And that will be over concerns about inflation, returns on investment, default rates, etc.