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If all goes as planned, the Federal Reserve will cease its program of purchasing mortgage-backed securities on March 31.  This program, which was created under the Bush Administration and then expanded under the Obama Administration, has served to keep mortgage rates at or near 50 year lows for the last several months.  The program has certainly achieved its objective of keeping rates low, but many fear the potential liability this program has created for the American public by effectively socializing the mortgage market. 

The end of this program will effectively mean the government will remove the mortgage market from "life support".  Nobody knows exactly what will happen when this occurs, but simply looking at the numbers suggests that rates will increase if the large demand of mortgage-backed securities is not offset by an increase in demand from institutional investors. 

Many economists have estimated that Fed purchases under this program have accounted for as much as 80% of the agency mortgage bonds that have been sold since the creation of this program.  From a supply and demand standpoint, one has to wonder just how much slack will be picked up by institutional investors once the government assistance ends. 

In a "normal" economy, the government does not directly intervine in the mortgage market; rates are determined by the supply and demand of mortgage-backed securities, which is a function of the open markets.  Government purchases of these bonds effectively means they are keeping rates "artificially low" by buying up a large portion of the supply of mortgage bonds. 

HOW MIGHT THE END OF THE FEDERAL RESERVE PROGRAM TO PURCHASE MORTGAGE-BACKED SECURITIES AFFECT HOME BUYERS AND HOME OWNERS LOOKING TO REFINANCE THEIR MORTGAGE?

• MORTGAGE RATES MAY INCREASE, PERHAPS RAPIDLY - If the decrease in government demand for mortgage-backed securities is not offset by an increase in demand from institutional investors, mortgage rates will almost certainly increase.  Again, nobody knows by how much, but just knowing that the government is purchasing as much as 80% of the securities in the market, the increase could potentially be substantial.   
• PURCHASING POWER MAY DECLINE - When and if rates increase, home buyers who qualified with a lender at lower interest rates may find their purchasing power has declined.  For example, the principal and interest payment on a $150,000, 30 year fixed rate mortgage at a rate of 5% is $805.23.  At a rate of 6%, the payment jumps to over $899.  The same payment of $805.23 will only purchase $134,305 at 6%.  So a 1% increase in mortgage rates can reduce purchasing power by over 10%! 
• SOME HOME BUYERS WHO QUALIFIED UNDER THE LOW RATES PRIOR TO THE END OF THE PROGRAM MAY DISCOVER THEY QUALIFY FOR MUCH LESS IF RATES INCREASE - A home buyer who qualifies for a $150,000 home mortgage at 5% might be startled to hear from their lender that they only qualify for $135,000 if rates go to 6%.  Mortgage qualifications are based on several factors, so not all home buyers may be affected in this way.  But it's certainly a possibility. 
• HOME OWNERS LOOKING TO REFINANCE THEIR MORTGAGE MAY LOSE ANY BENEFIT OF REFINANCING IF RATES INCREASE.  There are costs associated with refinancing.  Those costs generally need to be offset by the monthly savings a home owner will receive in order to justify refinancing their mortgage.  The higher the rate, the longer it will take to justify this cost savings.  And in some cases, the payment may not even decrease even with a lower rate because of the increase in the loan balance due to rolling closing costs into the loan. 

WILL THE FED EXTEND THIS PROGRAM?

It is always possible that the Fed could decide to extend this program; it was already expanded in March of last year.  However, public and government support of socialist programs like this one has certainly waned over the last several months.  Additionally, many inside the government and the Fed have expressed a desire to fundamentally change how the mortgage market works, even going as far as to suggest Fannie and Freddie should be dissolved in favor of another system.  What that system will look like is anyone's guess at this point.