A Silver Lining in the Mortgage Market: Fed Still Has Plenty of Tools in Its Kit

The Federal Open Market Committee meets today, its penultimate meeting before a March 31 deadline to end its buying of fixed-rate mortgages in the secondary market. Because Ben Bernanke’s re-appointment is in the news this week, the media is worrying over whether the Fed’s exit will push up mortgage rates, as in theWashington Poststory yesterday.

This urgency and hand-wringing may be misplaced: Things may not be as dire for the mortgage market as supposed.

I spoke with Gabe Poggi of FBR Capital Markets, a real estate equity research analyst who on November 25opined the Fed Reserve could use a form of “reverse REPO” to continue to support the mortgage market even if it exits as planned.

Poggi believes things could actually be just fine even if the Fed retreats as planned. Bernanke and team have lots of tools they could implement if they see mortgage rates start to rise after they bow out.

“The Fed would love the yield curve (including long mortgages and the Federal funds rate) to remain in this ball park where we are now,” notes Poggi, with 10-year Treasuries at about 3.6% and with 30-year fixed mortgages fetching around 5%. The Fed can afford a little spread of perhaps 25 to 40 basis points after they exit the scene. And if it looks like rates would widen beyond that — to, say, 100 basis points — “There’s lots of other paper out there,” the Fed can start buying to fix things.

Bottom line, the March deadline is a soft deadline; the Fed can always step back in because they’re the Fed.

“They know they can’t let long mortgages blow out 100 basis points,” concludes Poggi. “That’s the correction that the Fed will not let happen.”