Low rates are essential to keep the housing market “inflated”. If the Fed pulls its “support”, the demand for housing could plummet as rates (and payments) increase.
The Fed and the Obama Administration have a very strong incentive to keep rates low and the housing market relatively strong, as a collapsing housing market could drag the rest of economy back down with it.
The Wall Street Journal recently noted that there are about 10 million borrowers “upside down” in their homes right now (they owe more than their homes are worth). “Negative equity” is the single biggest harbinger of a potential foreclosure, so governmental officials are no doubt well aware of the risk all these upside borrowers pose to the market overall.
Hence, it is our bet that the Fed will extend its “support” for mortgage backed securities beyond March.
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