Quick summary of history of how mortgage rates ACTUALLY work (vs. the routine misinformation of the popular press). Happy to discuss this in detail (but want to get quick bullet points and examples out quickly)!
The Fed just cut the Federal Funds rates to 0 – this is the rate for banks to loan 24-hour long loans to other banks (this did NOT lower long term mortgage rates, the fed does not set mortgage rates, the market does, see below). The Fed funds rates are used to set the Prime rate (to businesses) and routinely used to set HELOC’s, Car loans and Credit cards. So the Fed is trying to lower rates on the rates it controls (Fed funds rates) and help lower rates on rates it can influence (such as auto loans and credit cards). But- the FED does NOT CONTROL OR SET long term mortgage rates! Instead, the free market does (see below).
Fed Chair Powell and team DO control Fed Funds rate, Do NOT control or set 30-year fixed Mortgage rates (= the BIGGEST takeaway). Jerome does not appear pleased in this photo.
- We have a mixed economy in the US – some of our markets are controlled by government committees (such as the Fed’s control of the fed funds rate just mentioned)- others are freely traded by a free market (as the price of Apple, Google or 30 yr fixed mortgage rates, the price of Avocados at King Soopers, etc.).
- Long term mortgage rates (30- yr fixed, 15-yr fixed) are set by freely trading markets, NOT the fed. These mortgages trade as Mortgage Backed Securities (MBS’s) as daily, continuously, set by the free market and market actors (banks, lenders, pension funds, individuals).
This is a chart of an actual minute by minute ticker for Mortgage Backed Securities (I printed 11:45 am on 3/16/20). These charts show continually trading of MBS’s higher or lower as investors bid to buy or sell mortgages. This market is the most important for setting mortgage rates (again NOT the FED above, millions of investors buying and selling MBS’s just like they buy and sell a share of Apple).
Chart for Share price of Apple. See how it trades up and down daily, its price is set by the market (millions buying and selling every day). The Fed does NOT control the price of the share of Apple (just like long term 30/15-year mortgages). If everyone wants to sell their Apple shares – the price will fall. If everyone wants to buy – the price will go up. Same with mortgages. Market voting raises and lowers the price (not Jerome).
The press continually confuses many dozens of different rates that exist in the world; the “rates” that the Fed (a quasi-governmental agency) controls, vs. the “rates” that the Fed does NOT control (such as mortgage rates).
In short, not only has the Fed NOT lowered mortgage rates to 0% by their lowering of the Fed Funds rates to 0%, mortgage rates are HIGHER today (morning of 3/16/20) than they have been over most of the last 2-3 weeks as investors are in panic in both Stock, bond, MBS, Oil and (most) other markets
Note above – the Fed Funds Rates to NOT control (or even correlate with) 30-yr fixed mortgage rates!
Hat tip Matthew Graham / MBS live.
Note above the recent DISCONNECT between Mortgages and the 10 yr Treasury over the last week – going in OPPOSITE DIRECTIONS! Showing a COMPLETE DISCONNECT between the 10 yr bond and mortgage rates (Bond falling, and Mortgage rates going HIGHER)! This is near uncharted territory folks – this is not how normal markets act.
Hat tip Matthew Graham / MBS live
What Do You Make of All This?
Not to worry! We will be happy to convey the rates available now- and work with you to update you as they continually change (up and down, during the day, and over the week).
If we find options that save you money – I would suggest locking in your rate & saving money ASAP (as market chaos is making these markets irrational, and many clients have lost out on locking as they waited for a rate that never arrives in the market). Lenders, appraisers and title companies are getting flooded with new applications – the line to the ice cream store is getting very long. Get in line if you want to save money on your mortgage!
In summary:
- The Fed does NOT Control Mortgage rates – the market does.
- The Fed did lower the Federal Funds Rate to 0% – this did NOT lower Mortgage’s to zero (in fact they are slightly HIGHER than over the last 2-3 weeks- HIGHER, not lower).
- Rates are still great – Millions of Americans can lower their rates, skip 1-2 months mortgage payments (helpful for the millions that will be at home with the kids out of school), access cash out for these uncertain times, etc.
- Call or email us with any questions (and please understand that we may need to call you back due to unprecedented call volume).
- If someone puts $100 in your hand- close your hand! If you can lower your rate & save a bundle take advantage of it as these rates are NOT guaranteed to continue, they are incredibly volatile and impossible (in my 22 year opinion in the trenches) to predict in such a panic motivated market.
- The mortgage, bond and Equity markets are trading under great distress and many long-term rules are no longer apparent in these markets. Rates are higher today (than last week and 2 weeks ago) –not lower. If you are a gambler – we will work with you and you decide when to lock. But if you can save money – let us know!
My team and I are here to help as much as we can in these trying times. Contact Front Range Mortgage at (303) 500-1900 in Denver and (719) 540-2020 in Colorado Springs.
