Tapering May Be Announced Sooner Than Expected

Nearly every Federal Reserve member except for the Chairman Powell and his potential successor, Lael Brainard, are in favor of announcing the beginning of tapering of mortgage bonds soon. Their next scheduled meeting is September 21st and 22nd and if the August Jobs Report is very strong like the last 3 have been, will the Fed announce that they will begin tapering soon? Or will they wait until their early November meeting?

According to MBS Highway the Fed is buying roughly $100 billion in mortgage bonds monthly even though they say they are buying $40 billion. MBS Highway believes the extra $60 billion every month is coming from repurchases of mortgage bonds. What is this? As mortgages are paid off the Fed is using this money as well to buy additional mortgage bonds.

Thus, what will the Fed taper? The $40 billion? Or the entire $100 billion? Our industry is closing about $300 billion in loans every month this year. Thus, if tapering means a reduction in purchases of $10 billion less a month, that $10 billion is only 3.3% of our current loan volume. This should have little impact on mortgage rates, but the announcement will cause mortgage rates to increase initially.

But, if the Fed quits all mortgage bond purchases over time the Fed’s purchases currently equal about 33% of all loan volume and this would definitely cause mortgage rates to increase sizably.