Breaking Down the Fed Announcement and its Impact on Mortgage Rates
The Fed on Sunday said it will begin buying $200 billion of mortgage-backed bonds, a move that will stabilize and likely lower mortgage rates, which moved sharply higher last week.
Fed also lowered the Funds rate to zero.
So, when can you see a 0% rate on the mortgage statement? Probably – never. And that is because the Fed Funds rate has pretty much nothing to do with mortgage rates. This blog that I published last week goes into the details if you are curious.
If you are not keen on reading the entire post, here is a snippet:
The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. That ladies and gentlemen has got nothing to do with mortgage rates. HELOCs – yes, but not the 1st mortgage rates.
In fact, the Fed left the rates unchanged between 2008 and 2016. So if the fed fund rate indeed impacted mortgage rates, they should have remained unchanged for 8 years. During those 8 years, mortgage rates moved in the range of 3.375%-5.125%, a very wild swing, I must say.
Mortgage rates had fallen to a record low two weeks ago, but a flood of refinance applications overwhelmed lenders and caused investors in mortgage-backed bonds to back off. The average 30-Year Fixed rates went from just under 3.25% to 3.625% in a week.
Quantitative Easing and Mortgage Rates
So, while the Federal Funds rate has no correlation with the mortgage rates, there is something else in that Fed announcement that can have an impact. And that something else is Quantitative Easing (QE).
As part of QE, the Fed said it will start buying $200 billion in Mortgage-backed Bonds (aka MBS), a move that will likely boost their price and lower rates to the borrowers.
As was done during the QE phase of the Great Recession, the Fed purchasing MBS should help cushion some of the blow to Americans by potentially lowering their mortgage payment or giving them an incentive to buy a home,” said Dave Stevens, former CEO of the Mortgage Bankers Association and former commissioner of the FHA.
Now, it’s anybody’s guess if the rates will go down to the same level as it did a few days back. The lenders across the spectrum are so backed up with refinancing from the last rate drop, do not expect any substantial rate drop this time. However, it should definitely help lower the rates from where they are right now.
Last time those rates lasted all of 2 days. So, be in touch with your mortgage advisor and be fully prepared to take advantage of it this time if you missed the boat the last time.
My recommendation – If you get a lower rate than what you have right now, take advantage of it; do not get too greedy. So, a rate of 0.25% lower than what you have with nothing to very little closing costs, you should grab it. These are very volatile times so if you can get something better – take it. Also, expect that any new loans can easily take 60 days to close, if not longer.
Everyone in the industry working beyond capacity plus the unpredictable nature of CoronoVirus and it’s impact on appraisal, underwriting, and processing = Very delayed turn times.
And if you were lucky enough to lock it the last time, consider yourself wise and stay put since nothing changes for you.