The Federal Reserve has been buying Mortgage Backed Securities for the last 13 months.

They will be officially out of money at the end of March.

Now what?

I’ve been closely watching how the Federal Reserve (the Fed) has been purchasing Mortgage Backed Securities (MBS) and thought I would give you a little color on what I’ve seen. Since the inception of the program in January 2009, the Fed spent $1.19 trillion in the MBS market. That’s 95.6% of the $1.25 trillion allocated, and scheduled to run out March 2010. This leaves the Fed $55 billion left to spend over the next 6 weeks.

 The goal of the Fed’s program was to purchase MBS at below market rates in order to provide support to the housing market. They did this by purchasing large blocks of MBS thus keeping stability in the market and driving down interest rates. In this respect the program has been a success and we’ve enjoyed very low and very stable interest rates for the past year.

So what happens now? The Fed’s relying on private investors to come into the market at the end of March and purchase billions of dollars of mortgage backed securities in order to keep rates stable. We are - by definition - a free market economy based on the Father of Economics, Adam Smith’s invisible hand driving the market. I believe in free economy and when it comes to the mortgage rates, its critical private investors step in to fill the void.

But the question begs asking - where are the private investors now?  If the rate of return was high enough, investors would be clamoring to jump in now undercutting the government for access to these investments. Unfortunately, that’s not the case, and in order to entice investors, MBS valuations will have to become less expensive relative to benchmark Treasuries. When that happens, mortgage rates will increase.

It’s basic supply and demand economics. The country has a constant supply of mortgages needing to be purchased. Investors need to purchase those loans. If the government had to buy over a trillion dollars of those loans in the last year the message is clear - the private sector needs a greater rate of return. How does an investor get a greater rate of return? Interest rates have to rise to get investor demand to buy the loans.

So how can you benefit from this information?

If you believe in the logic presented, then you are under the gun to get locked in on an interest rate very soon. But what if you haven’t located a property to purchase? Great news – I have a solution. Coldwell Banker Mortgage is one of the only lenders offering the ability for you, the customer, to cap your interest rate at today’s rates for the next 90 days while you look for a property. Call me, e-mail me, contact me any way you can to ask about Pre Purchase Rate Protection (PPRP). You have insurance to protect your car. You have insurance to protect your health. You can even buy vacation insurance. Shouldn’t you insure yourself with a service that protects you from looming rising mortgage interest rates?