As I have mentioned many times before, the only way we could get mortgage rates down this low was with the Fed buying up mortgage backed securities and creating an artificially inflated market, aka the “mortgage rate bubble”.  They have been the creators of the bubbles in the past through their actions, so why should this one be any different?

Well, the headlines not too long ago stated that Paulson and Bernanke wanted mortgage rates to be as low as 4.5%, some mortgage originators even developed their own agenda of 3.5% mortgage rates as another bait and switch advertising campaign.  But reality is quite different and the Fed knows that.  Or do they?  We can see what their MBS purchase pattern looks like and you can see they are not trying to drive mortgage rates down at all right now.  In fact, it looks more like they are trying to keep mortgage rates from spiking higher, bringing into question whether or not they are already realizing that mortgage rates are headed higher and likely quickly, so they need to dampen that burden on the economy.

Here is a chart I did that shows their actions each week, allowing you to see where their purchasing concentration is.  Click on the picture to get the full sized graph.

As you can see, the Fed was buying mortgage backed securities with lower coupon rates in the beginning.  They are still concentrating their purchases of Freddie Mac mortgage bonds in the lower coupon rates, but even here they have crept away from the 4.0 and only last week dropped back into the 4.5% MBS.  The Fannie Mae purchases are quite different, however.  The Fed’s focus on Fannie Mae mortgage bonds has drifted, and stayed in the higher coupon ranges, namely the 5.5% coupon and bleeding into the 6.0% MBS last week.

So what does this all mean?  In all likelihood, the Feds are expecting mortgage backed securities market pressure to drive mortgage rates higher.  In fact, they may even be concerned about their actions turning into inflation down the road and the market reaction to that fact.  That means they have little power to drive mortgage rates lower and the best they can do is to maintain mortgage rates, or more realistically, keep mortgage rates from spiking. 

With the shift of the purchases towards the higher coupon bonds, one of two things are taking place.  They likely are attempting to maintain stability in the markets as much as possible.  The other possibility is, in my opinion, a little less likely, that is they are purchasing higher coupon rates because those loans are likely to get refinanced and paid, thus allowing them to recoup their investment fairly quickly.  With the Fed playing with “fake” money, aka printing new money to build their balance sheet (Bernanke favors this tactic to create inflation), I doubt this is what they are focused on, not to mention that it is a gamble they may not pay off.

Decide what you may, but the reality is the Fed is not going to drive mortgage rates lower through the purchase of mortgage backed securities.  That means, all those people out there looking to refinance or even purchase homes at the lowest mortgage rates already missed the boat.