Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
Next week will bring another momentous event for the US Economy. All eyes will be on the Federal Reserve as they gather for another “Federal Open Market Committee” policy meeting, at which time it is highly anticipated that there will be another rate increase. I am not alone in predicting a.25% rate hike, despite what appears to be a softening of key economic data over the past few weeks. Furthermore, the majority of the Fed’s leadership predict two or more rate hikes over the remainder of 2017. Before 2015, it hadn’t raised rates in nearly a decade as it tried to jump-start the weak housing market with 0% interest rates.
Granted, there isn’t much news or originality in what I just wrote, and anyone who is paying close enough attention to the markets would have been able to suggest the same. Where the novelty comes in however, is in deciphering the recent Fed “minutes” which outlined the behind the scenes conversations and discussions of the Federal Reserve that was released last week. In general, the Fed minutes can always be significant, but this one I thought was especially telling, and a bit of a surprise. I actually read through the encyclopedia-sized small print analysis and was able to extract some potentially interesting shifts of policy on the horizon.
I had previously discussed about the impact of the Federal Reserve purchases of mortgage backed securities. I detailed how it has artificially boosted the housing market by keeping interest rate low. There are many who believe that the Fed’s rate policy is hurting millions of savers in the US, and creating a bubble in the stock market that is drawing in more and more people who shouldn’t risk their wealth in equities. The debate only continues to grow with each passing Fed meeting, as the Fed’s balance sheet continues to soar. The Fed currently holds $1.75 trillion of MBS from quantative-easing bond purchases, and also owns significant allocations of US Treasuries as part of its $4.45 trillion of assets.
In past meetings, the Fed has maintained its existing policies of reinvesting principal payments from its holdings of agency and MBS debt. Each month, the Fed portfolio receives sizable principal payments on its securities holdings, which, if not reinvested, would decrease the size of the portfolio. By reinvesting these funds however, the Fed maintains longer-term securities at sizable levels, which have helped maintain accommodative financial conditions. These purchases of securities by the Fed were funded with excess reserves essentially created by the Fed as part of its radical policy of “quantitative easing,” or QE. The result has been a sharp tightening in credit-spreads that has effectively suppressed the true cost of credit. Still with me?!
This policy appears to be now changing. There are several ways that the Fed could shrink its balance sheet, and the uncertainty of how the Fed would “unwind” the portfolio was a sensitive topic for the markets. If the Fed were to start selling its holdings, that would cause tremendous disruption to bonds. Instead, they recently hinted at slowly stopping to reinvest in mortgage-backed Securities by doing some sort of a “reverse-tapering” and a gradual reduction of how much they would continue to reinvest. The concept seems well thought out, and hopefully will not cause much turmoil as they execute their plan.
In curtailing its purchases however, the result is likely to cause a rate spike, with higher fees and costs to mortgage borrowers. At the same time, President Trump will have to determine the future fate of a Fed chair and vice chair, as well as several governors. A change in leadership could mean a further shift in policy at the central bank. As the markets begin to better understand the president’s strategy on Fed members, that too could shake things up. Buckle up, it might get very bumpy, very soon!
Getting a mortgage is so much more than just getting a rate quote, it is about being guided to consider the myriad of short-term and long-term financial considerations and how they might have an impact on your personal situation. This is but one of the factors to keep a close watch on next week!
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