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Taper Talk

The financial world has been buzzing with taper talk. But what is taper and why is it causing volatility in mortgage rates?  To help you understand I decided to write this article. But I warn you, the details are as stale as your Thanksgiving date bread and will probably put you in a literary coma. 

In 2008, America fell on hard times when the housing bubble burst, splattering the country with fears of depression. Home values plummeted and foreclosure rates headed for the thermosphere – Earth's outermost atmospheric layer in case you wondered. Private investors fled the mortgage-backed securities market (MBS) and banks quickly lost their ability to sell mortgage debt. It's been 500 million years since things froze that fast.
Right, wrong, or indifferent, the government and Federal Reserve (known as the Fed) sprang to action with a series of bailouts that became known as Quantitative Easing (QE). Much of QE was designed to purchase  mortgage-backed securities (MBS) freeing banks from mortgage debt and allowing them to lend again.  Crisis averted, sort of.

Fast forward five years, add two more rounds of QE and we find the Fed still heavily engaged in the purchase of mortgage-backed securities. QE is considered unsustainable. Prior to 2009, the Fed did not own a single dollar in mortgage securities. In 2009 they held 2 trillion and today it's only slightly less. The Fed acknowledges that the program must end but rather than quit cold turkey, they will taper back.

There are two major concerns with tapering: Will private money return when the Fed exits the market? What happens to mortgage rates?
The Fed is a large investor and has the ability to influence mortgage rates – simple supply and demand.  If the Fed were to exit quickly, rates would end up near Pluto-- an unlikely move that would cause another liquidity crisis, or worse.  Tapering allows private investors time to return to the market.
Like an awkward giant, the Fed's enormous presence intimidates investors at every move. It creates unease which drives markets to unrest. Thus, the volatility.

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