As the deadline for the Federal Reserve’s $1.25 trillion purchase program for mortgage-backed securities draws to a close, speculation remains high about its potential impact on interest rates.
Some analysts believe mortgage rates will rise and mortgage funds may be affected as prices of mortgage securities will subsequently fall. The prices of mortgage securities have an inverse relationship with mortgage rates. This implies that as prices fall, investors will face declining returns for mortgage funds.

Currently, the three governmental agencies Ginnie Mae, Fannie Mae and Freddie Mac provide funding for more than half of all U.S. home loans by issuing securities. After the financial crisis broke out, the Federal Reserve kept mortgage rates low by purchasing securities issued by these three agencies.

This expectation of falling mortgage security prices is causing some portfolio managers to cut their holdings of agency securities. Despite this, a large number of investors are betting against the sharp rise in interest rates once the Federal Reserve exits the market as they believe government-backed mortgage securities will still be an attractive option compared to other investments.