Mortgage rates get left behind after Feds’ slashing spree

While it seems like the whole world is collapsing around us — let’s remember that “this too shall pass.” If you’ve checked mortgage interest rates recently you’ve probably been shocked by what your loan officer quoted you.

While the Federal Reserve just reduced the federal funds rate to essentially zero — mortgage rates skyrocketed. What happened? What should you be doing now if you are an existing homeowner, or are considering a home purchase?

Let’s start with a look at what the federal funds rate controls. By definition the federal funds rate is “the interest rate at which depository institutions lend reserve balances to other depository institutions overnight.”

In other words, it’s the interest rate that banks charge each other for short-term loans. It’s the Central Bank’s easiest way to control U.S. economic growth. For you and me it means a lower rate for our credit cards, personal loans, home equity loans and “adjustable rate mortgages.” But fixed-rate mortgages do not move directly with Fed rate cuts.

So, what’s causing mortgage rates to rise? Let me start by going on the record as saying I am no expert in economics. But I have been in the industry for many years, have embraced the highs and weathered the lows. And have listened and learned from those who are experts. What I’m hearing is that mortgage rates have risen due to two major reasons:

1.) Uncertainty

Uncertainty is described as doubt. When the economy is going bad and causing everyone to worry about what will happen next — this is a prime example of uncertainty. We all have been affected by the coronavirus pandemic.

Most of us have had a negative impact on our finances — stock market plunges, layoffs and state-ordered closures of non-essential businesses. It goes on and on. So, if you were an entity that sets a mortgage interest rate, i.e. Fannie Mae, or Federal National Mortgage Association; Freddie Mac, or Federal Home Loan Mortgage Corp.; Federal Housing Administration; or Veteran Affairs — how would you know what is the correct rate to set to attract investors to buy your bonds?

I think the uncertainty in the markets has these entities taking a conservative approach resulting in higher mortgage interest rates.

2.) Supply and demand

The supply and demand part requires a little technical explanation. When mortgage loans are packaged into large bundles they are sold on Wall Street as instruments called mortgage bonds. Mortgage bonds act like any other bond in that there is an inverse relationship between price and yield. The price is what an investor would pay you to purchase your bond. The yield is the actual interest rate, your mortgage rate.

Huge losses in the stock market have created a need for companies to raise cash by selling the Treasuries (bonds) that they hold. The market is now flooded with Treasuries creating more sellers than buyers. In order to attract buyers, sellers have had to reduce the price of their Treasuries. As prices go down — our interest rates go up.

It’s been said that the only thing permanent in life is that everything is temporary. I think good advice right now is to watch and wait. While remembering that homeownership is the main source of wealth creation in America — more than any other asset.

Rick Piette is the regional sales manager for All Western Mortgage. He has been a Las Vegas resident and mortgage expert for many years. Contact him at rickp@allwestern.com.