Neuswanger: Will the Federal Reserve’s actions lower mortgage rates?
Recently the Federal Reserve Bank has signaled it might be done raising interest rates, and some believe it may cut rates. The Fed dictates short-term interest rates by changing the rate it charges member banks for short-term loans to cover banks’ short-term liquidity needs (often known as overnight loans).
This allows bankers to loan out far more money to customers than the bank has in deposits. The cost of that money reflects what banks pay for interest in deposits and what they charge consumers for borrowing money.
What the Fed does not do, at least directly, is set rates for long-term mortgage rates. That money comes from investors who buy bonds issued primarily through Fannie Mae and Freddie Mac. Fannie and Freddie are federally chartered companies that enjoy the benefit of having the federal government guarantee that those who invest in their debt offerings will be paid. That debt is used to fund trillions of dollars of home mortgage loans.
If an investor is weighing options to invest, four of his choices would be to put the money in the bank, buy a treasury bill, invest in mortgage bonds, or invest in stocks.
A bank deposit is safe, liquid and would pay the lowest rate of return. Treasury bills are the next level and pay more but carry some risk as the value may fluctuate. Mortgage bonds will generally pay slightly more but are more volatile in value and may be impacted by more economic forces than the two earlier alternatives. Stocks can pay the highest returns but can be very volatile.
When the Fed decides to raise or lower rates it directly impacts short-term rates immediately. If the action is deemed to likely help the economy, investors will sell bonds and buy stocks. Decreased demand for bonds will drive down the price and push up the return paid, which means mortgage rates can rise. If the action is deemed to likely slow economic growth, the opposite happens and mortgage rates are lower.
Right now there are many uncertainties as to how the foreign trade policies of the Trump administration will impact the economy. If they slow the economy, the Fed may freeze or lower rates to stimulate economic growth to counteract the loss of foreign trade.
Only time will tell if investors will buy into this as a viable solution. My advice to clients is if it’s not broken, don’t fix it. With mortgage rates in the high 3 to low 4 percent range for a 30-year fixed conforming loan, it’s a good time to make a move on a refinance or a purchase. Things might improve slightly, but they could get way worse on a moment’s notice.
Chris Neuswanger is a loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. His website and blog are http://www.mtnmortgageguy.com He welcomes mortgage related questions from local readers.
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