What's really keeping mortgage rates down?

Mortgage rates are below 5% again. But they might not stay that way for long -- even though the Federal Reserve reaffirmed its ridiculously low, 0% to 0.25% target for the federal funds rate.

Yes, it's great for borrowers that the Fed kept its target rate so low. But the text you should really care about is this little tidbit from the Federal Open Market Committee's policy statement:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010."

You see, for the last nine months or so, the Federal Reserve has stocked up on mortgage-backed securities to relieve that troubled area of the credit market. So in addition to keeping its target rate low, the Fed gave homebuyers an additional boost by buying up $650 billion worth of MBS from Fannie Mae and Freddie Mac. At its end, the buying program will eat up $1.25 trillion-worth of the distressed securities.

Why should you care? Because as long as the Fed buys gobs of mortgages, mortgage rates stay especially low. What's unclear is how much the Fed's moves are helping. According to one estimate from Calculated Risk, a well-regarded economics blog, it's probably depressing mortgage rates by about 0.35%.

The program was initially set to expire at the end of this year, but now the Fed says it will stretch the program through the first quarter of 2010. Granted, 0.35% might not seem like much help, but the difference between the payments on a $400,000 mortgage with a 5% rate and one with a 5.35% rate is more than a thousand bucks a year. Don't buy a house just because mortgage rates are low -- home prices are still falling in many areas -- but for those on the fence about refinancing, this should be welcome news.

Speaking of homes, props go to Carla Fried for pointing out the questionable benefits of the first-time home buyers tax credit a few days ago. It seems that many economists, on both the far left and the far right, agree with her. Check out this roundup of opinions over at the Las Vegas Sun. It quotes economists from the libertarian Cato Institute, the liberal Center for American Progress, and the Brookings Institution. They all had the same message: The tax credit is too expensive and doesn't work. Voices in support? Realtors and politicians. Go figure.