The Fed Leaves the Funds Rate Unchanged

benbIt’s no surprise that the Federal Reserve left the funds rate at the current lows of 0 – 0.25% on the heals of continued weak housing data.   What investors are looking for is “what” is being said in the FOMC Statement that is released in conjunction with their rate decision.

If you have a home equity line of credit that is tied to the prime rate, your rate should be unchanged (for now).   Otherwise, this decision does not have a direct impact on mortgage rates.  It does influence the markets (stocks and bonds) which impacts mortgage rates.

Here’s what I extracted from today’s Statement:

Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit….employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months….subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Prior to the FOMC Statement, mortgage backed securites are flat (but still at record levels with very low mortgage rates).   Follow me on Twitter to see live rate quotes.   If I have intraday rate changes today, I’ll update this post.

Fed Funds Rate cut 0.25% to 2.00%.

The FOMC cut the Funds Rate another 0.25% to 2.00% based on an 8-2 vote.  Remember, this does not mean that the 30 year fixed rate is now 0.25% lower.   This does mean that if you have a HELOC that is attached to Prime (and it’s not fixed), your rate will go down 0.25%.  Prime will be reduced to 5.00%. 

The FOMC also reduced the Discount Rate 0.25% to 2.25%. 

The Fed Statement regarding today’s rate cuts will have a more dramatic impact mortgage rates (mortgage backed securities).

“Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters….

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices…”

The 0.25% rate cut was highly anticipated and all ready priced into the market.   We’ll see how bonds react once the markets have a chance to absorb the statement and Fed actions today.    This week will remain very volatile with rates…tomorrow is loaded with economic indicators and Friday, we have the big daddy:  The Jobs Report.

I am a Mortgage Dispenser

Over the past month, I’ve been combing through my database of my closed clients who have either adjustable rate or balloon mortgages.   I’m sending each and every [photopress:july55ad.jpg,full,alignright]one of them a letter reminding them of the terms of their mortgage.   Regardless of how much time I spend explaining how their mortgage program functions, as soon as someone has moved into their new home and they’re unpacking boxes—they’ve forgotten the fine details to the financing that made buying a home possible! 

The letters restate what is disclosed on the Federal Truth in Lending and their Note, including what their margin and caps are.    It also addresses when their first adjustment will take place and what the worse case rate and payment may be.   Worse case payments are currently not disclosed on the Truth in Lending.   

I began my mortgage career on April 1, 2000.   So far, 20% of my closed transactions have been adjustable or balloon mortgages and 3% of my total closed business would be classified as “subprime

Ba-Ba-Ba-Benny and the Fed

Aw come on and sing along with me (Benny and the Jets).   Ben just surprised many by dropping both the Fed Funds and the Discount Rate by 0.50%.    It’s too soon to tell how this may impact mortgage interest rates…however it (the Fed Funds rate) directly drops the rate home equity loans are based on to 7.75% (Prime Rate).    You can see by the chart below that waiting on rate reductions from the FOMC to impact long term mortgage interest rates may not be the move for you to make.


Chart compliments of Loan Tool Box

The Fed based this reduction due to ” the tightening of credit conditions has the potential to intensify the housing correction”.   To read the entire press release, click here.

The Federal Reserve and Mortgage Rates

Beeswax dragonConsumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.

The Federal Reserve affects short−term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage−backed securities, which trade on a daily basis.

The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds. Stocks and bonds compete for the same investment dollar on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage−backed securities. Unfortunately, selling mortgage−backed securities to fuel stock market rallies causes interest rates to go up, not down.

Historically, there have been many times when the Federal Reserve has increased interest rates. Stocks then sell off in fear that the increase will affect corporate profit margins, and the liquidated stock assets need a place to park until the next rally comes along. The safe haven is found in mortgage−backed securities which cause mortgage rates to drop. The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. I make it a point to continuously monitor interest rates for my clients, and advise them of opportunities to manage their mortgage debt at a better rate. This is the foundation of my business model as a Trusted Advisor.