Fed Struggles to Damp Rise in Mortgage Rates

--Fed is tackling too many issues at the same time: boost money market liquidity, buying MBS/Agency, recapitalizing banks, and buying toxic asset; Some worked and might work in the future, but some might fail. It seemed making no sense to buy MBS to increase mortgage credit. It is a dangerous game. It will take probably more than 500 bil to maitain the mortgage credit for a while, not a shor time frame. I hope it is a calculated move. By PRABHA NATARAJAN President Obama has vowed to lower mortgage rates for Americans, but that may be easier said than done. Since the start of this year, the Federal Reserve has spent some $70 billion buying bonds backed by home loans in an attempt to lower mortgage rates. After an initial success, however, rates are starting to drift higher again. It is a reminder of the problems facing the U.S. housing market and highlights the limits of the Fed's ability to stabilize conditions. The central bank has pledged to buy $500 billion in mortgage bonds by June, with the promise that it would purchase more if necessary. The 30-year fixed mortgage rate fell as low as 4.875% at the start of January from above 6% in November when the Fed first announced its purchasing plan. But the momentum has changed and the rate has been moving higher, hitting 5.34% Monday, according to Bankrate.com. Other factors outside of the central bank's control have kept mortgage rates from falling further. Increased borrowing by the federal government to fund stimulus packages has helped drive underlying Treasury yields, and by extension mortgage rates, higher. Uncertainty about whether the Fed will continue its purchases after June -- as well as the future of Fannie Mae and Freddie Mac -- also has worked to keep mortgage rates from falling further. Typically, the 30-year mortgage rate is based on the sum of the 10-year Treasury yield, the risk premium on mortgage bonds guaranteed by Fannie and Freddie, and bank fees and charges. The Fed's intervention only targets lowering the risk premium on mortgage bonds over Treasurys. Average premiums have shrunk one percentage point to 1.8 percentage points since the Fed announced its program late last year. However, Treasury yields have climbed over the past month as the government churned out more debt, negating some of the impact of the Fed's mortgage purchases. The Fed has said it would consider buying longer-dated Treasurys, which would send government-bond yields lower again. The Fed said last week that it would only buy Treasurys if that move would be "particularly effective in improving conditions in private credit markets." Reuters Foreclosures in Stockton, Calif., discourage prospective sellers from putting their houses on the market. Another complicating factor for the Fed is one of its own making. Lower rates have caused many homeowners to refinance existing mortgages. Rising refinancings, however, create new supply, and there is concern about whether there are enough private investors to buy these freshly minted mortgage bonds. "Buying $500 billion worth of [mortgage bonds] seems like a lot, but it's not enough to absorb the potential supply coming into the market from refinancing activities, which are expected to climb even further with rates remaining at this level," said Sean Dobson, chief executive officer of Amherst Holdings, a boutique mortgage-securities trader. The central bank, however, has said that it would go beyond the $500 billion amount if needed. There still is no clear strategy to prop up the housing market. Some argue that lower rates alone aren't a fix, as home affordability still remains an issue. Others suggest that the best option may be for the government to create an entity through which it could offer 30-year mortgages at preset rates of, say, 4% or 4.5% as an incentive to draw in potential homeowners. However, the issue with such a program is the lack of investors. "Not a lot of buyers are likely to want to buy a 3.5% mortgage-backed security, so the government may end up being a significant holder of these loans," said Nicholas Strand, a mortgage strategist with Barclays Capital. "And that number could run up to trillions of dollars