Wednesday, September 21, 2011

Fed decides to put more downward pressure on long term interest rates!

The Fed announced a new policy called “Twist”, this new policy will allow them to sell short-term bonds to free up money so they can buy long-term bonds, as well as buy more Mortgage backed Securities, while keeping their balance sheet the same.

Here is how the money flows:
• The banks make loans that it knows it can sell to Fannie Mae and Freddy Mac
• Fannie Mae and Freddy Mac “Securitize” these loans into Mortgage Backed Securities
• These MBS will deliver a certain rate of return
• Insurance and Investment Companies buy these MBS with our 401K and other investment money

This is why so many 401K’s and investments dropped when the Mortgage Crisis hit, all those bad MBS’s stopped paying out… and our investments tanked, and banks would not lend any money because no one was buying MBS's. So the Fed has been buying them, providing “liquidity” into the market.

Therefore, in buying the MBS's, it will provide more money into the market and allow the banks to continue to lend while keeping long term interest rates down.

The other item that we all need are for home values to increase… many homeowners cannot take advantage of the low rates because they are so far underwater Fannie Mae and Freddy Mac will not buy these loans, therefore the banks will not make the loan.

If you find this info helpful, or not, or want to hear more on this topic please let me know by commenting on this blog, as well as, sharing it with friends, family, and co-workers.

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