Interest Rates: Could Mortgage Interest Rates Rise to 6.5? Some Experts Say Yes (VIDEO)

LOS ANGELES, CA — Feb. 24, 2010 – ( http://www.freerateupdate.com) – Could 30 year mortgage interest rates (Freddie Mac FRE, Fannie Mae FNM, and FHA 30 year fixed rates) rise to 6.5, from below 5, in just a matter of weeks once the Fed discontinues their buying of MBS? Many experts say the answer is yes. While prominently it’s expected mortgage interest rates rise about half a point, the effect of the Fed’s withdrawal from the buying of mortgage-backed securities is unknown.

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What it really comes down to is supply and demand. Banks have continued to originate mortgages at high volume in part thanks to the Fed’s willingness to purchase pools of the mortgages, even at a time when one might consider them too risky an investment. Thanks to the Fed, demand has remained relatively strong and banks who need to sell the mortgages in order to continue funding new mortgages have been able to do just that.

Mortgage-backed securities prices have remained strong thanks to Fed purchases that have kept demand strong. As a result mortgage rates which move the opposite MBS prices, have gone down and remained down. With the Fed out of the picture, who is going to step up and buy these securities? Who, especially right away, would want to? MBS will become quite the risky investment. Who is to say that gap isn’t filled and mortgage-backed securities plummet pushing mortgage rates up 1 full percentage point or more.

This is a possibily. That’s why the Fed has said in the last week, if something like this occurs they may enter back into the MBS marketplace.

Here’s a video discussing this. Click to play.