But higher rates mean fewer people will refinance or move, so the mortgage portfolio won’t shrink as fast as the Fed anticipates. There are some whispers about the Fed selling some of its mortgage-backed securities. If that’s the case, Charles Schwab expects the MBS spread will grow even larger, and odds are so will your mortgage rates.
There will also be a hangover from the very low rates in 2020 and 2021. Like many people, I bought a home in the spring of 2021. Now between rising rates and a slower housing market, I am not sure I can ever afford to move. The housing market may be slower and less liquid for a long time.
The MBS market may be less liquid, too. Their buyers normally assume that a large number of mortgages won’t last 30 years because people move or refinance. But given that so many people got artificially cheap mortgages before rates went up means their behavior, and the duration of mortgage-backed securities, will be much less predictable. It will be a riskier asset that commands a larger spread.
The Fed has come under lots of criticism lately for being too late to raise rates in response to inflation. But another policy error could be that it kept buying so many mortgage-backed securities later in 2020 and most of 2021 when the housing market was on fire and rates kept dropping.
A 2.6% fixed rate on a 30-year risky asset never made much sense. It suggests something is off in the market, either through some manipulation or a mis-pricing of risk. The Fed created major distortions in a market where many Americans have most of their wealth, and the impact may be felt for decades.
Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.