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New Fed Tactic Triggers Dramatic Drop in Mortgage Rates

November 27th, 2008

This week’s mortgage news was dominated by a dramatic drop in mortgage rates triggered by a new Federal Reserve approach to the financial crisis.

Of all the actions taken to address this crisis, none has had such immediate and tangible effects. Neither lowering Fed rates nor providing direct financial support to lenders seemed to make so much as a ripple in the credit markets. However, on news of this latest Fed program, 30-year mortgage rates dropped the better part of a full percentage point, falling near their all-time lows.

The Fed has announced that it will buy $600 billion in existing, mortgage-backed debt. This move both frees up capital for new lending, and gives lenders renewed confidence to make loans. It is the latter especially that accounts for the immediate drop in interest rates.

It is worth a closer look at what this action will and won’t accomplish, but in the short term it is undeniable that it has created a rare opportunity for home buyers and people who want to refinance. 

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