Crazy market. Below is commentary on what exactly is happening when the “Fed cuts rates.”
Yesterday’s Fed move caused folks to think back on what Fed Funds really are. Remember that “Fed Funds” is the rate that banks can borrow money from each other to keep their reserve amounts in line. This is a one day, or overnight rate. 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, but they can’t change mortgage rates. If a borrower asks you why their mortgage lock doesn’t drop .75%, here is the simplest answer. Moves in overnight rates aren’t directly linked to mortgage rates. They set the stage for lower rates, but usually weeks down the road. I like to use the analogy of steering our economy with steering a huge tanker in the ocean. If the captain of a big tanker wants to make a left, he turns the wheel a mile or so in advance. Same thing with the economy. Corrections made now usually do not manifest themselves for a month or two.
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.
Here is something to consider. Yesterday’s stock market opened in a free fall. The Fed had to make an emergency cut announcement to stop/avoid a stock market collapse. The “stock market” liked the move, came back in the end, and only closed around 128 points down in the Dow. Now here is the thing…If the Fed did not cut the Fed Funds rate and Discount Rate, our mortgage rates would have been lower. A simple rule of thumb is if the stock market is up, rates can be up. If the stock market is down, rates usually follow. So, what do you think might happen if the Fed cuts again at next weeks meeting? If the stock market perceives the cut as a good thing and goes up do rates follow?
For those “students of the game” who are still reading, you may wish to check out the links below.
http://library.hsh.com/?row_id=91 may be a help to you.
Also check out http://biz.yahoo.com/cnbc/080122/22783168.htmlThe above was written by Chris Weber of Residential Pacific Mortgage. Chris may be contacted at email@example.com Warren Carreiro, Broker warren@RealtyOfMarin.com www.realtyofmarin.com