The Fed Acts to Push Mortgage Rates Lower

In it's first action to directly influence mortgage rates and the housing market, the Federal Reserve has announced that they "will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae."

There's more:

This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

This action is aimed directly at, and intended to narrow, the interest rate "spreads" between Mortgage related securities and treasury securities, which have been leaking wider ever since the Fed stopped short of affirming a "full faith and credit guarantee" for Fannie and Freddie's obligations.

If you read our post last week on why mortgage rates are higher than they should be, you'll have some great context as to why the Fed had to do this.

Prices of mortgage backed securities are sharply higher on this news.  Expect mortgage rates to see .25 in improvement immediately, (putting them in the sub 5.5% range for 30 year fixed paper) with further gains possible as the market sorts out the impact of this action.

11/25/08 at 09:35 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Breaking News, Fannie Mae, Freddie Mac, GSE's, Interest Rates, The Fed

Fed Funds Vs. Mortgage Rates

 
A great graphic from the folks over at Econompic Data that illustrates just how little correlation there is between the Federal Funds Rate and Mortgage Rates.

Sometimes, a little eye candy will make the same point it takes us a few hundred words to get across.

The Fed cut rates by .5% to 1%.  This is the lowest level for the Federal Funds Rate since 2003, and there may be more cuts to come, in case you did not catch the news.

10/29/08 at 03:24 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed

Fed Day: In Which We Explain Once Again that the Fed Does not Control Mortgage Rates

At 2:15 ET today the Fed will release a policy statement and rate decision, so this is your obligatory "The Fed does not set mortgage rates" post.  You'll find the policy statement itself at this url, so feel free to join us in hitting refresh every few seconds until the policy statement appears.

Most Fed watchers expect the Fed to slash the Federal Funds rate by .5%, though there is the chance that the Fed goes further and cuts by .75% or 1.0%.

Predicting the impact of a cut on markets or mortgage rates is a dicey business - nobody really knows what direction they'll move, or if they'll move much at all in the wake of a Fed cut - It is a mental coin flip, at least in the short run.

This is true even in normal times, and doubly so today with all of the chaos and volatility in the financial markets.

But whether mortgage rates rise or fall after the Fed's accouncement today, a question worth asking is this: 

What impact will a cut to the Federal Funds rate have on the economy, really? Will it turn around the housing market?  Will it prompt employers to ramp up production, add jobs, etc.?  Will worried consumers start consuming again, en masse?

We think not.  Mortgage rates are already low.  The job market is weakening.  A besieged real estate and stock market is creating a negative wealth effect.  Demand for all forms of debt is cratering.

Against that backdrop, it is hard to conceive a .50% cut to the Federal funds rate will change much of anything - the impact is just too far removed from main street.

Economists call this "pushing on a string": You can influence any point along it, but the influence diminishes the further you get from the point of action.

So if (despite the best efforts of Bernanke and the Fed) the economy does continue to slow, and inflation continues to moderate (a big IF, given all of the debt being issued) we may see mortgage rates decline.

Or, you could just flip a coin.

10/29/08 at 10:51 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed

Follow the Leader: Rates Surge After Fed Decision

The sound and the fury Yesterday afternoon was mortgage rates jumping after the FED elected not to cut interest rates.

You read that right.  The Fed did not adjust the Federal Funds rate, (it remains at 2% ) yet mortgage rates jumped, enough to wipe out the post Lehman gains we saw Monday.

There's a couple of reasons for this, but the key take away is something we've harped on a lot around here - the Fed does not control mortgage rates.  Mortgage rates are based on the price of a mortgage bond, or mortgage backed security.  These prices, and by extension mortgage rates, are determined by the market - mainly big name Wall Street firms and large institutions trading with one another.

In fact, more often than not, Mortgage rates lead the Fed, falling well in advance of cuts, and rising in advance of hikes.  Now, that is not a hard and fast rule, but it usually works out that way.

Among the Factors that caused Yesterday's jump (recall: when the price of a mortgage bond rises, rates fall.  When prices of mortgage bonds fall, rates rise.)

1. AIG: The rumor-then-reality of a Fed bailout of AIG buoyed investors, who rotated money out of the safe harbor of the bond market and back into stocks and other investments.
2. The market had (perhaps) priced in a Fed cut, and when it did not materialize, the prices of mortgage bonds fell, forcing mortgage rates up.
3. Bank selling.  Because mortgage bond prices have improved, and nearly every bank is in need of capital, they used this as an opportunity to take some money off the table by selling.

Another lesson on the unpredictable nature of the mortgage market, and how *fleeting short term dips in rate can be. 
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*By the way, if you got caught napping and missed an opportunity, you can keep up with intra-day rate movements by subscribing to my twitter feed right here.

09/17/08 at 12:24 PM Permalink | Comments (3) | TrackBack (0)
Filed Under: Interest Rates, The Fed

Fed Policy Statement: Fed Leaves Rates Unchanged

Because the Federal Reserve Website will be flooded and down for much of the afternoon, we grabbed a quick screenshot. Click to biggify.

No cut.  See our post earlier today for the possible impact on mortgage rates.

09/16/08 at 01:20 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed

If the Fed Cuts, what Happens to Mortgage Rates?

Yesterday, we pointed out the increased probability of a rate cut by the FOMC (The Fed) today.

Today, we thought it might be worthwhile to explore the "if" part of the equation. 

As in: if the Fed cuts, what happens to mortgage rates?  What if they don't cut?

Views on this are very mixed, and this is one of the rare times that the market is not entirely certain what the Fed will do, so here's our take.

A Fed rate cut would, perversely, push mortgage rates higher.  Investors would see a Fed cut as a positive sign and money which has been flooding into mortgage backed securities would flow back into stocks and other investments.

If the Fed stands pat, the outcome is less certain.  Mortgage rates could improve, as investors begging for a rate cut continue to shift assets into the safe haven of bonds. Or they could stay the same - the mortgage market has seen a tremendous rally, and it is uncertain how much appetite remains for mortgage-backed bonds.

Keep in mind that there is extraordinary disruption in the financial markets.  Anything, even the unthinkable, can happen. All eyes will follow the Fed's policy statement for clues but either way they've got their work cut out for them.

Also, just to frame things up for everyone, the WSJ unpacks the case for, and against, the cut:

The case for a quick rate cut: Continued market turmoil could hurt an already weak economy. Mortgage rates fell last week after the government's takeover of mortgage giants Fannie Mae and Freddie Mac, but market turmoil could push rates up for both mortgages and other consumer loans.

And..

...cutting rates now would carry its own risks. It could remove some of the Fed's flexibility in the event that the financial crisis worsens.

We'll be back with more as things develop.

09/16/08 at 11:38 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed

Is a Fed Rate Cut Coming Tomorrow?

According to the TED Spread, short dated notes, and the Fed Funds Futures Market, they will.  David Merkel Gaffen (whoops!) at the WSJ Marketbeat Blog elaborates:

It was not until Sunday that the idea of the Federal Reserve actually reducing rates in the market Tuesday became a possibility. Now the market is depending on it, as futures markets are pricing in 100% odds that the slide-rule committee will lower rates at its meeting.

And by how much?

[David Rosenberg, chief North American economist at Merrill Lynch] believes the Fed will lower rates by a half-percentage point Tuesday.

09/15/08 at 05:02 PM Permalink | Comments (3) | TrackBack (0)
Filed Under: Interest Rates, The Fed

Fed Decision: How Will it Impact Mortgage Rates?

As you've no doubt heard, the Federal Open Market Committee concluded its meeting at 2PM today and announced that the Federal Funds and Discount Rate will remain at current levels.

Though this will get plenty of coverage in the mainstream press, we wanted to take a moment to explain how this action may impact mortgage rates in particular.

As you'll recall, when the Fed announces an interest rate decision, the decision itself is less important than the accompanying policy statement, which articulates the Fed's views on the economy, inflation and the outlook for future changes to Monetary Policy (rates, etc.)

It is that document, (which makes up for being somewhat boring and often obtuse - except to mortgage geeks like this one - by being mercifully short) which can drive mortgage rates.

You can read the whole thing in less than 30 seconds right here.

What Does this REALLY mean for mortgage rates?

Though it will take a few days for the dust to settle, the immediate result today is that rates are moving up - the stock market is up over 300 points as I type this - as money flows out bonds into a stock market that has taken the Fed statement like a shot in the arm.  Expect to see this reflected in lender rate sheets this afternoon or tomorrow morning.

From a broader point of view, within the context of today's policy statement, the Fed seems to suggest that an economic slowdown is more cause for concern that the presence of inflation, and it does not appear that a return to rate hikes is imminent.

Silver Lining?

Though the initial reaction looks to be higher rates, If the Fed is correct - that inflationary pressures will moderate - this may be good news for mortgage rates. It is useful at this point to insert a very simple rule of thumb that describes the relationship between mortgage rates, and inflation.

Elevated inflation = Higher rates; Lack Inflation = Lower Rates

In that sense, moderating inflation will will keep the door open for low, or lower, mortgage rates through the end of 2008.

Also, don't forget, credit standards continue to tighten, so even if prevailing rates fall, the cost of financing (larger down payments, credit based interest rate adjustors or additional fees) may continue to rise.

08/05/08 at 04:53 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed

How Someone's Power Breakfast in Philly May Cost you Money

One of the broader points we try to get across here at Behind the Mortgage is that mortgage rates can and do move around due to factors that may surprise you.

In fact, one of our very earliest posts, way back in 2004, showed how African Weather can impact mortgage rates.

And it is not always material events in the weather or markets that move rates.  Sometimes, words are enough. Especially if the words are uttered by the right guy (or gal.)

Case in point, Philadelphia Fed President Charles Plosser, at something called the Philadelphia Business Journal Book of Lists Power Breakfast:

Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. We will need to reverse course — the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around.

In english: He's advocating for rate hikes to start sooner, rather than later. This, predictably, sent mortgage bonds lower today, and caused rates to tick up.

Get your power breakfast on.
Perspectives on the Economy, Monetary Policy, and Inflation [FED]

07/22/08 at 04:47 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed

Fed Day: It's Not What They Do, but What They Say

Today, at 2:15 EST, the Federal Open Market Committee wraps a two day meeting with a rate decision and a policy statement.

It is a foregone conclusion that the Committee members will vote to keep the Federal Funds rate and the Discount rate unchanged at 2% and 2.25%, respectively.

To the casual observer, hearing news that the Fed has kept rates steady might lead you to conclude that mortgage rates will stay the same.

But for those of us watching mortgage rates, what the Fed does doesn't matter.  The Fed does not control mortgage rates, but how the Fed handles monetary policy, and other economic concerns, can influence mortgage rates a great deal

So it's what the Fed says in the accompanying policy statement that counts, and can send mortgage rates careening in one direction or another.

That's because the policy statment, in addition to articulating the rationale behind the Fed's rate decision, also is peppered with clues as to the Fed's outlook on the economy and their stance, or position, on future rate activity.

It is this outlook that can drive mortgage rates, and often not in the direction you'd expect.

For instance, as recent public comments by Fed officials, and the Fed Funds Futures Market suggest, if the Fed begins to raise rates because inflation is a growing threat to the economy, one might think that this would cause mortgage rates to rise. 

That would be the wrong conclusion. In fact, the Fed "signaling" a return to rate hikes later this year may actually (surprisingly?) help mortgage rates. 

Why?  One word: Inflation.  It's everywhere you look, and perhaps more importantly, the expectation that it will continue has caused mortgage rates to rise.  So the Fed going into inflation fighting mode (AKA rate hikes) should allay these inflation expectations, and allow mortgage rates to fall.

Or that's one theory anyway.

Whether or not the Fed actually sends this signal, or the market interprets as much from their famously obtuse policy statements is another matter.  We'll report more later today.

In the mean time, here's a couple of posts on the topic that caught our eye:

Economy to Fed: I Thought I Told You to Remain on the Command Ship [Accrued Interest]

Food for Thought on the Big Picture and Inflation Ahead of the Fed [Interest Rate Roundup]

06/25/08 at 09:40 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed