Thanks for visiting The Mortgage Reports. To stay absolutely current on mortgage markets and important guideline changes, be sure to take my free daily email alerts.

Several weeks ago, the Federal Reserve pledged $500 billion to the mortgage-backed bond market and, after the announcement, mortgage rates fell.

This happened because conforming mortgage rates are directly correlated to the demand for mortgage bonds.  When demand rises, prices rise with them, thereby causing rates to fall.

The Fed's announcement was timely. 

After reaching a peak volume of nearly $1.0 trillion this summer, foreign nations got nervous about the health of the U.S. economy and began to divest their U.S. mortgage-backed debt holdings. 

Over a 3-month period, demand for mortgage bonds from overseas fell 17 percent, creating an excess bond supply that was mostly responsible for October's high mortgage rates.

If you bought a home late last year, you remember that 30-year fixed rate mortgages were pushing 7 percent.

And then the Fed stepped in.  By adding $500 billion worth of demand in a coordinated effort, the Fed offset waning foreign demand and altered the mortgage bond landscape.  The mere announcement spurred a mortgage bond frenzy and, as a result, rates fell sharply.  October's 7 percent mortgage turned into November's 6.  Rates have since fallen further.

On New Year's Eve, the Fed said it would complete its $500 billion block of purchases prior to June 30 -- an average of roughly $4.1 billion per business day.  Over the first few days of 2009, however, the Fed's cumulative purchases fell roughly 25 percent short of pace.  This tells us that the Federal Reserve could be carefully selecting the days on which it intervenes in order to make a maximum impact on mortgage bond markets.

It also foreshadows a highly unpredictable period for mortgage rates.  High demand or not, until the markets figure out the Fed's Playbook, don't expect the usual "rate triggers" to apply.