Traditional Risks Likely to Emerge with Mortgage Bonds

As the Federal Reserve withdraws its support to the housing sector by putting an end to purchases of mortgage bonds, the housing industry does not appear to be unduly perturbed with the turn of events. The Fed initiated a massive $1.25 trillion bailout for the sector after the subprime crisis severely impacted the stability of the markets leading to a crash in prices and brought about a standstill in activity.

Although it was quite clear that the Fed would not be able to sustain continuous buying of mortgages to help the housing segment, analysts expected some disturbance when the actual withdrawal took place. However, with the formal stoppage of further Fed purchases on Wednesday, the market has not reacted much.

The situation is in clear contrast to that some months ago when the majority of investors feared a second housing market crash as soon as the central bank pulled out. It was believed back then that without the Fed supporting the markets, home loan rates would hit the roof, leaving very few borrowers with adjustable rate mortgages in a position to fulfill repayment terms. High rates would also deter new home buyers from making investment in homes thus leading to a complete slowdown in activity. What has actually happened after the Fed withdrawal is certainly not as disastrous as feared.

The lack of disturbance in the market is being attributed to the fact that big institutional buyers are currently just waiting on the sidelines. Improved activity in the housing markets has made mortgage loans an attractive investment proposition once more while the general economic improvement has left most of these investors with funds to invest in safe areas.

However the optimism and confidence need to be tempered with caution and judgment according to experts. Now that the economy is regaining its balance, it is obvious that normal market forces will once again come into play. Interest rates will begin to climb as industrial growth improves. This will make loans more expensive and less easy to pay off quickly.

Investors in mortgage bonds will need to keep in mind that the payback period for loans will increase as interest rates go higher. Investors will need to set aside a bigger fund than what they did a few months ago to purchase mortgage bonds in the current economic climate. The exposure will be higher, and so will be the risk.

Speak Your Mind