by Calculated Risk on 1/07/2010 08:27:00 PM

From Liz Rappaport and Jon Hilsenrath at the WSJ: Fed Plan to Stop Buying Mortgages Feeds Recovery Worries

The Federal Reserve's pledge to stop buying mortgages by the end of March is sparking fears among home builders, mortgage investors and even some Fed officials that mortgage rates could rise and knock the fragile housing recovery off course.

The authors review the concerns described in the minutes of the December FOMC meeting. From the FOMC minutes:

... some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness, including the termination next year of the temporary tax credits for homebuyers and the downward pressure that further increases in foreclosures could put on house prices. Moreover, mortgage markets could come under pressure as the Federal Reserve's agency MBS purchases wind down.

Others are even more worried, from the WSJ:

... Ronald Temple, portfolio manager at Lazard Asset Management ... sees mortgage rates rising by a percentage point when the Fed stops buying. A withdrawal of government support, combined with high unemployment and rising mortgage foreclosures, could push home prices down 20%, he said.

... home builders and others are hoping the Fed will flinch. ... If the Fed stops buying, "it would be the beginning of a crisis again, and we haven't emerged from the last one," said Larry Sorsby, chief financial officer at home builder Hovnanian Enterprises Inc, ... Mr. Sorsby figures the Fed's withdrawal would prompt at least a one-percentage-point rise in mortgage rates, which he fears could squash recent glimmers of more demand for homes. He expects the Fed will, in fact, keep buying. "I doubt they'll just pull out," he said.

First, it is very unlikely that mortgage rates would rise by 100bps. My estimate is around 35 bps.

Although the Fed has made it clear - repeatedly - that they would either continue the program or restart it if they felt it was necessary, I think it is likely that the Fed will stop buying MBS by the end of March - and then react to whatever happens ...