Mortgage Rates Rise in Response to the Fed’s Rate Cut

September 21st, 2007 categories: Real Estate Finance

On Tuesday, the Federal Reserve announced that it was lowering both the Feds Fund Rate and the Discount Rate .5%. Many expected that this bold move would translate to lower mortgage rates. However, in the days following the Fed Rate Cut, mortgage rates actually moved higher as traders became fearful that the cut may lead to higher inflation over time.

If you are like many, you may be asking yourself how is that possible? As it turns out, the Fed Rate cut only helped lower short term rates not long term rates. Mortgage rates are based on Mortgage Backed Bonds known as Mortgage Backed Securities (MBS). It is the trading performance of Mortgage Backed Securities, issued by Fannie Mae and Freddie Mac, that drives mortgage rates up or down. Mortgage rates do not rise and fall in response to the Fed’s actions, rather they respond to the market’s reaction to the Fed’s move.

Inflation will always be a negative for bonds and for mortgage rates. Any long term bond pays a set amount of money over a long period of time. Inflation will make that set amount less valuable. Therefore, traders will be weary if they feel inflation will de-value their long term investments.

It is not necessarily what the Fed does that affects mortgage rates, it is how the Nasdaq and the broader stock market interprets the Fed’s action that ultimately influences mortgage rates.

When the Fed’s lowered the Discount Rate and the Feds Fund Rates .5%, investors began to fear inflation, and it was the fear of inflation that actually drove the price of bonds down. Bond prices and mortgage rates move inversely so when bond prices fell, mortgage rates went up. Click here to learn more.

The silver lining is that mortgage rates are still very attractive. There may even be slight dips in mortgage rates on some days in the next few weeks.

Working with a mortgage professional who watches the market daily will ensure you use the current market conditions to your advantage and lock on the right day.

I am recommending that my clients cautiously float their loans as we may see a little relief in rates next week. Keep in mind that conditions can change rapidly, and I will be watching the market closely and may advise my clients to lock quickly in response to the market.

Here are today’s rates:

30 Year Fixed Conforming 30 Year Fixed Jumbo

6.125% @ 1 point 7.0% @ 1 point

6.375% @ 0 points 7.625% @ 0 points

Lysa Catlin

CMC Finance, Inc.

(858) 456–3000 office

(858) 456–6200 fax

loans@lysacatlin.com

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Mortgage Rates Rise in Response to the Fed’s Rate Cut

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