Frank Nothaft, chief economist, and deputy chief Leonard Kiefer point out that over the past five months the Federal Reserve has gradually tapered the growth of its holdings of mortgage-backed securities (MBS) that it acquired through three rounds of quantitative easing. For May 2014 the Fed planned to hold growth in its holdings to $20 billion, one-half of what the monthly pace had been from the start of the third round (September 2012) through the end of 2013.
Despite this curtailment, mortgage rates have largely held steady with fixed-rates even dipping in early May to levels last seen in November. This happened because the Fed tapering has coincided with a sharp reduction in mortgage originations and thus new MBS issuances. In fact, the ratio of the Fed's MBS acquisitions to new issuances is slightly higher than a year ago. In other words, the Fed's 'demand' for new MBS has declined less than has new 'supply'. This is one reason the primary market is currently enjoying lower than expected mortgage rates. New MBS will continue to run below that of last year because of the sharp decline in refinancing which is down from about 80 percent of the dollar volume of mortgages in January 2013 to 43 percent last month and is expected to decline further. Freddie Mac's economists expect to see the 30-year fixed-rate mortgage gradually rise to around 4.6 percent by the end of the year as the Fed continues to 'taper' and ultimately reduces its share of new MBS issuance.