Mortgage Rate News

Rumors are flying that an emergency Fed rate cut could be in the works. While many expect a 75 basis point cut on March 18, the latest interest rate news is that an emergency Fed rate cut may be needed before next week’s scheduled meeting. The last emergency Fed rate cut came just eight days before a scheduled Fed meeting. At which time the Fed cut rates again.

24/7 Wall Street offers this insight on why current measures to stimulate the economy with rate cuts have been unsuccessful:

With oil-based products and gasoline taking more of the consumer dollar, a relief on the credit side would be more than welcome. The problem the Fed has is that most banks are not passing lower rates on to businesses and consumers.

Even though banks are getting lower rates, and they have been getting lower rates with the Fed funds rate at three percent. they still aren’t passing them on. Perhaps the rate cuts will be passed on when the Fed funds rate makes to an expected two percent by the end of April.
In the case of mortgage interest rates, though, it doesn’t matter that much anyway. Last week, mortgage interest rates went up. And an emergency Fed rate — or any Fed rate cut for that matter — is unlikely to change anything.

The reason for this lies in the fact that mortgage interest rates, with their long-term nature, are more tied to 10-year Treasury notes than they are to the short-term Fed funds rate. This means that when inflation goes up (and it is on its way) mortgage interest rates follow the bond rates higher.

If you haven’t refinanced to a fixed mortgage rate yet, you could be in for a bumpy ride.

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While in some case mortgage lenders will go along, at least in the short term, with a Fed rate cut, the truth is that the Fed’s fund rate has little to do with mortgage interest.

Why?

Because mortgage rates are tied more closely to 10 year Treasury note rates. Mortgage interest is a long term rate, while the Fed fund rate is short term. So while there could be some effect on your second home mortgage (especially if it is a home equity line of credit), your main mortgage interest is likely to be unaffected — even if you have an ARM.

With the latest Fed rate cut on Wednesday, the 10 year Treasury note ended up in an interesting position. These bond notes respond to inflation. Long term inflationary pressures, that is. So with this Fed rate cut, inflation could be a problem. And that means that mortgage rates following the long term bond market lead are unlikely to fall anytime soon.

So, your mortgage interest is probably going to be affected only minimally by the latest Fed rate cut. For the most part, other factors will affect what sort of mortgage rates you have to choose from, including marketing expedients for mortgage lenders desperate to draw applications for home loans.

The Fed rate cut will affect other aspects of your financial life, though. Consumer debt (credit cards, etc.) will see lower rates, and cash investments will see lower yields. And while the stock market usually does well with a Fed rate cut, it is in turmoil due to economic concerns.

This Reuters video offers more on the Fed rate cut:

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The stock market is going crazy over yesterday’s Fed rate cut of 50 basis points. Indeed, there are plenty of investors excited about the rate cut, which makes money cheaper, which means more profits for companies. But what about in the case of home mortgage interest rates? Mortgage rates dropped a couple of weeks ago on the anticipation of a Fed rate cut. Now that the cut has materialized — and it’s every bit as big as one could hope for — where will the housing market go now?

There are plenty of people that will benefit from the current Fed rate cut. Jumbo loans are likely to drop their rates, important in pricey housing market locations. Additionally, those with ARMs are likely to benefit. When their rates reset within the next year, they won’t be as high. Mortgage payments will go up, but they will remain within the realm of the manageable by many home owners, staving off some foreclosures.

But the effects on the housing market aren’t going to be immediate. And the effects on the subprime market are unlikely to be that big. After all, those with questionable credit may not be able to refinance into a better loan. And many loans on the subprime market come with prepayment penalties. So that means that most people saddled with them can’t afford to refinance anyway.

And there is another problem. CNN Money reports on how liquidity is still a factor that the Fed rate cut can’t fix for the housing market:

However, the real problem in the housing market is not interest rates, according to Keith Gumbinger, vice president for HSH Associates, a mortgage industry publisher. It is that there is not enough money available for making loans.

“The liquidity problem hasn’t changed,” Gumbinger said. “The primary issue is trust between buyers and holders of debt.” Investors holding worthless or heavily discounted paper are not eager to buy more.

So, while the stock market soars (for now, at least) and some find that the Fed rate cut is offering some relief, a housing market recession is still in the works.

But the Fed rate cut may have stopped a broader recession. Only time will tell.

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