In its statement following the Dec.16 meeting, the Federal Open Market Committee announced that it will "employ all available tools" to revive the economy. These tools include the large-scale purchase of agency MBS and debentures, as well as the possibility of buying long-term Treasury securities. A key goal is to provide support to the mortgage sector and the housing market, while stimulating a refinancing wave to both improve the cash flow situation of borrowers and support the earnings of mortgage lenders.

The 75-plus basis point decline in conforming fixed mortgage rates since mid-November has triggered a pop in refinancing application activity, judging by the Mortgage Bankers Association's refinance index, as well as the December prepayment report. Nonetheless, primary conforming mortgage rates remain stubbornly high relative to Treasury yields; the spread between the Freddie Mac survey rate and 10-year Treasury yield is almost 100 basis points higher than its five-year average (2003 to 2007). Along with factors dictated by the current economic and lending environment, this suggests that a 2003-style refinancing wave is unlikely.

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