The Federal Reserve

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Moving on....


Does the Federal Reserve directly affect mortgage rates?

Lately, the number one question I get is what are rates right now. We read in the news that the federal reserve has cut interest rates by .75% or .5% and many people think that directly correlates to rates, the answer is unfortunately it doesn't. When the federal reserve cuts rates it does NOT have a direct affect on rates.

Here is why

"Fed Funds" is the rate that banks can borrow money from each other to keep their reserve amounts in line. The “Discount Rate” is the interest rate at which an eligible financial institution may borrow funds directly from the Federal Reserve when their reserves dip below the reserve requirement. The Discount Rate is considered the last resort for banks, which usually borrow from each other. The Federal Reserve can change either the Fed Funds rate or the Discount Rate, but they can’t change mortgage rates. If a borrower asks an agent why their mortgage lock doesn’t drop .75%, there are two answers. First, the loan is locked, and they have an obligation to the lender, just as if rates moved the other way. Second, moves in overnight rates aren’t directly linked to mortgage rates, and http://library.hsh.com/?row_id=91 may be a help to you.

Mortgage rates are dependent upon many more complicated factors than the Fed raising or lowering them. The supply of mortgages, the demand by investors for them, the value of the servicing, the credit quality of the borrower, etc. all factor into mortgage rate. Also check out http://biz.yahoo.com/cnbc/080122/22783168.html

Another great indicator of mortgage rates is how the 10 year bond is doing. Go to http://money.cnn.com/markets/bondcenter/? and check out the bond rates. If the price is going up and the yield is coming down then rates should be getting better that day.