- The Washington Times - Friday, October 2, 2009

On Sept. 25, the Federal Reserve Board of Governors met and proclaimed that the U.S. economy was on the mend. In its statement published after the meeting, it said that “economic activity has picked up following its severe downturn.”

One would think that long-term interest rates, including mortgage rates, would have ticked up after the statement was published. The Fed has a very difficult job of keeping the economy in balance. On the one hand, it wants to promote economic growth that will create jobs. On the other hand, it must see to it that the economy doesn’t overheat, which can lead to a very harmful inflationary cycle.

The positive tone about the economy would have led me to think that long-term fixed investments, such as Treasury bonds and mortgage-backed securities, would have sold off due to the possibility of inflation in the future. Inflation erodes the value of such investments.

Interest rates actually fell slightly because the Fed also announced that it would stretch out its goal to purchase a staggering $1.45 trillion in mortgage-backed securities and other debt by the end of March. Previously, the Fed had planned to end the purchases by the end of the year. This policy is designed to keep rates low.

I recently sent out one of my periodic mortgage updates via e-mail to a very large group of folks that is comprised of existing and former clients, friends and other folks interested in keeping informed about the mortgage market. I’d like to share my synopsis with the readers of this column.

The credit freeze is thawing, albeit slowly. While the easy money programs such as “no documentation” loans are largely extinct, rates are very low on traditional fixed and adjustable programs. These loans are widely available for qualified borrowers.

The so-called “zero closing cost” refinance program is again widely available. While rates in general have remained low over the last couple of years, the rates on this program were too high to be a practical alternative. As of this writing, qualified borrowers with an eligible loan balance might find a 30-year fixed-rate loan with no points or closing costs near a rock bottom 5.25 percent or lower.

Most analysts believe that today’s rate environment is being held at its current level artificially due to the Fed’s intervention. In other words, rates are likely to rise when the Fed exits its policy of purchasing long-term debt.

While I’ve rarely tried to predict the timing and direction of long-term interest rates, I can’t ignore the current landscape and its components. If there was ever a time in my 20-year career in the mortgage business when I might say, “Don’t wait, now is the time to refinance if it makes sense,” it would be today.

Stay tuned.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.

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