Posts Tagged ‘Federal Reserve’

Potential Shake Up at the Federal Reserve

August 1, 2017

Janet Yellen’s days may be numbered. She is the current head of the Federal Reserve, and her role is up for renewal by President Trump. While he has been coy in the past about his plans to (or not to) replace her, signs are pointing to the fact he might indeed do so.

Trump has made no secret about his desire for low interest rates. This tends to fuel stock values/growth (something President Trump enjoys), but it could cause problems down the road. It also marks a significant shift in the philosophies of our major political parties:

  • Democrats traditionally want lower rates to encourage job and wage growth.
  • Republicans tend to want the Federal Funds rate to be higher to fight off inflation.

There is another angle to consider: Ammunition for the Federal Reserve when there is another economic down turn. Lowering the Federal Funds rate is a classic monetary policy employed by the Federal Reserve to help stimulate the economy in times of slow growth/recession. We saw the Federal Reserve lower the funds rate after the “.com” bubble burst, and then raise it as the economy recovered. This repeated after the housing collapse, and the Feds are now raising the rate again to have this as a fallback position for next time (there will be a next time). If rates are kept low, the Feds won’t have this as an option. Japan have kept their “federal funds” equivalent at zero for many, many years with little impact. They recently started a “negative” rate policy that has also shown little results in getting their economy back on track.

It is a delicate balance, and will be interesting to see how it plays out.

The question that most people reading this blog want to know is how will this impact mortgage rates. Mortgage rates tend to work in opposite fashion to the Federal Funds rate.

  • the Federal Funds rate directly impacts rates on second mortgages, car loans, credit cards.
  • mortgage rates are determined by the value of mortgage backed security bonds. These bonds (and all bonds) hate inflation. As inflation rises, bond values drop. As bond values go down, mortgage rates go up.

It stands to reason that mortgage rates could improve as the Federal Reserve raises the Federal Funding Rate. That is exactly what has happened as the Fed raised rates. Mortgage rates improved after the Federal Reserve raised rates in December 2015. Mortgage rates skyrocketed after the election (when stock prices went up dramatically). Mortgage rates have improved since the Fed began raising the Federal Funds rate again at the end of 2016 and into 2017 (while stock values have been mostly flat/slightly higher).

It will be fascinating to watch how this unfolds as traditional party philosophies, the economy, monetary policy, and mortgage rates all stand to be impacted by the decision.

Mortgage Rates and the Second Part of the Fed’s Announcement

June 23, 2017

The Federal Reserve’s announcement last week that it was increasing the Federal Funds rate included a second statement regarding the Fed’s bond holdings.  The Fed began buying Treasury and mortgage bonds after the Great Recession to lower long-term loan rates.  In the process, the Fed increased its debt holdings by over five times the previous balance – to over $4.5 trillion.

As part of last week’s announcement, the Fed said it will allow a small amount of bonds to mature without being replaced.  The Fed also said this amount will gradually rise as markets adjusted to the process.  Experts stated, “This process could put upward pressure on long-term borrowing rates.”

With the Fed out of the bond-buying business, the overall demand for Treasury bonds and mortgage backed securities will decrease.  A reduction in the demand for these investments should cause their prices to fall.  Remember that when values of mortgage backed securities fall, mortgage rates rise.

 

That is how the second component of last week’s Fed announcement can push mortgage rates higher.  Not by increasing the Federal Funds Rate, but by no longer buying bonds (and also possibly selling the bonds they already own). We could be entering an environment of lowering bond values and rising mortgage rates.

We can assume that Fed will be careful not to shock the markets too dramatically, so we don’t expect rates to dramatically increase. The goal of the Fed would be to complete the second part of their statement without pushing mortgages rates up.

That being said, mortgage rates are currently at their lowest levels of 2017.  Now is a great time to buy a home – from a mortgage perspective.  If you are looking to buy in Georgia and you want focused service with a keen attention to detail, call me at Dunwoody Mortgage Services.  We will do as much of the “heavy-lifting” as possible so your mortgage experience is as pleasant as possible.

 

How Fed Decisions Could Affect Mortgage Interest Rates

June 19, 2017

Yesterday, the United States Federal Reserve increased its short-term interest rate by 0.25%.  From a historical perspective, the “Federal Funds Rate” is still very low.   Many people assume that this increase in the Federal Funds Rate means that mortgage interest rates will rise too.  Not so fast…it’s possible that the opposite could happen.  When the Fed raised this rate in December 2015, mortgage interest rates declined in the weeks following the announcement.  Mortgage interest rates remained very low throughout 2016 until immediately following the Presidential election in November.  The Fed raised rates again in December 2016 and March 2017.  Current mortgage interest rates are about 0.5% lower than their level when the December 2016 Fed rate increase occurred. 

Why do mortgage rates sometime move in opposition to the Federal Funds Rate?  It’s complicated, but at a high level, mortgage interest rates tie more closely to the investment markets than to the Federal Funds Rate.  The majority of American home mortgages are purchased by Fannie Mae and Freddie Mac.  Fannie and Freddie then “package” these mortgages into mortgage-backed securities (MBS).  They then sell these MBS as investments. 

So insurance companies, mutual fund companies, and other large investors then buy and sell MBS as a component of their larger investment portfolios.  That means that the MBS must compete with other investments for investors’ attention. 

Many times, if the market for equities increases (as reflected by indices like the Dow Jones or NASDAQ), mortgage interest rates will also increase to keep MBS competitive with the equities.  Similarly, if interest rates on certain Treasury Notes and other bond-type investments increase, mortgage interest rates will follow suit.

Ultimately, it means that in many cases, an increase in the Federal Funds rate does not automatically mean that mortgage interest rates will increase too.  If the stock market reacts negatively to the Fed’s decision or other economic news, mortgage rates can decrease even though the Federal Funds rate has increased. 

Yesterday’s Federal Reserve statement also included another announcement that could affect future mortgage interest rates.  The Fed stated that it will begin reducing its huge holdings of Treasury and mortgage bonds.  Let’s talk about the mortgage impacts of that announcement in another blog post next week.

For now, if you, a friend or family member wants to buy a house and fears that home price appreciation and interest rate increases will hurt your ability to buy, give me a call at Dunwoody Mortgage to discuss your options.  We offer VA, FHA, conventional, jumbo, and Home Ready loans – we offer a mix of mortgage products that can help different buyers’ differing situations.   I would love to explore your options with you.

Federal Reserve’s impact on rates

March 21, 2017

I feel like I spend a lot of time devoted to the topic of the Federal Funds Rate. The main reason is the misconception out there when it comes to the Federal Funds Rates. Last Wednesday, the Feds raised the Federal Funds Rate again. Every time this happens, I get calls and emails with people worrying about mortgage rates going up. That isn’t necessarily the case.

Mortgage rates are not determined by the Federal Funds Rate… car loans, credit card rates, second mortgages… those are impacted by the Federal Funds Rate.

Mortgage rates are determined by the value of Mortgage Backed Security Bonds (MBS bonds). As these bond values go up, mortgage rates go down. When these bond values fall, mortgage rates go up. Typically, when the Federal Funds Rate increases, it should help mortgage rates improve. Why?

MBS bonds hate inflation… I mean they can’t stand inflation. As inflation rises, MBS bond values plummet and make interest rates worse. As the Feds increase the Federal Funds Rate, it helps fight inflation. This, in turn, helps MBS bond values to rise, and mortgage rates to improve:

  • the Federal Funds Rate increased in December 2015. Over the next few months, mortgage rates improved by 0.500%. Rates stayed around these levels for all of 2016. Rates got worse at the end of 2016 after the election fueled a major stock market rally. That triggered another typical trend with rates… when stock values go up, bonds go down, and mortgage rates go up.
  • The Funds Rate was increased again in December 2016, and mortgage rates improved by 0.125% in the 6 weeks between Fed meetings.
  • We are about a week past the most recent rate increase by the Fed (third time since December 2015). So far, mortgage rates have improved by another 0.125%

What does this mean? When you hear a story about mortgage rates rising because of the Federal Funds Rate going up, don’t panic. The Funds Rate may go up, but mortgage rates could improve.

If you are looking to buy a home in Georgia, contact me today to get started. We have two tools to help you in an ever-changing rate market.

  • Float Down: Should rates improve after we’ve locked your rate, we can float it down at no cost to you one time during the loan process. If rates improve by 0.250% or more, we are within 30 days of closing, but 8 days prior to closing, we can float the rate down to current market value. That’s it. Easy! We have a three-week window to take advantage of this.
  • Lock-and-Shop: Worried that rates might go up? Don’t be. We can lock a rate for 60 days without being under contract to purchase a home. The rate is locked, find a home, and we start the loan process. The Float Down option as described above also applies to the Lock-and-Shop. So, you can get the protection of locking the rate, but also the opportunity to lower the rate should mortgage rates improve. The rate will not get worse so long as it is locked.

It is as simple as that!

How Could Fed Rate Increase Affect Mortgage Rates?

December 20, 2016

For the first time in a year, the United States Federal Reserve raised the federal funds rate by 0.25%.  How will that impact mortgage interest rates?

Here’s a history lesson:  The last time the FED raised the federal funds rate was in December 2015.  By the end of January 2016, mortgage interest rates actually improved by about a half point.  Mortgage rates then stayed flat (for the most part) until June and July, when they continued to improve.  Mortgage rates stayed at this very low level until election day.  From election day through December 15, 2016,  mortgage interest rates increased about 0.75%.

When trying to analyze mortgage interest rates, it makes sense to look at a mortgage loan as an investment.  Here’s why…Fannie Mae and Freddie Mac purchase most of the conforming mortgages originated in the USA.  They “pool” these mortgages into mortgage-backed securities (“MBS”) which are bought and sold on Wall Street just like other investments.  MBS provide investors with regular, predictable income (from the interest payments on the mortgages), so they are considered less “risky” than stocks and mutual funds.

But ultimately, MBS must compete with all other investments for investors’ dollars.  In the recent, post-election period, stock values have increased making equity investments more attractive.  To compete, lenders had to raise mortgage interest rates to provide a greater return and compete with the high-flying equities.

 

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In addition, China has been selling large amounts of its US government debt holdings.  As China sells, that creates pressure to raise interest rates on US government debt.  Again, government debt competes with MBS for investor dollars.  As interest rates on government debt increase, mortgage rates may have to rise to remain attractive to investors.

So what is a home buyer to do?  If you plan to buy soon, you can relax knowing that, once you get a home under contract, your lender can lock your interest rate through your closing date.  This means that if market interest rates rise between the time you lock your rate until closing, you still pay the lower rate specified in your lock.  You are protected against rate increases.

In addition, Dunwoody Mortgage offers a free interest rate float down on some mortgage products.  This means that, if market mortgage rates drop after you lock your rate, we might be able to lower your rate before closing.  With the free float down, after you lock your rate, you are protected should interest rates increase, and you may still be allowed to benefit if market rates decrease.

Ultimately, we at Dunwoody Mortgage are working in the best interest of our borrowers.  If you are looking to buy a house anywhere in Georgia, and mortgage interest rate changes make you nervous, contact me.  We can set you up with a loan program that can help protect you against the ups and downs of mortgage interest rate changes.

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Feds may not raise rates at all this year

October 18, 2016


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Well over a year ago, the Federal Reserve indicated they would begin raising the Federal Funding Rate. This started in December 2015 when the rate increased by 0.250% for the first time in almost a decade. While we didn’t expect a 0.250% increase each time the Feds met this year, surely there would be another increase at some point. Right?

The year is almost over, and the Feds have stood their ground. The comments from the most recent Fed meeting made it sound as if it is doubtful there would be an increase this year, but could be in 2017 as the economy continues to reach employment goals.

Does that mean potential buyers should panic as rates may go up in 2017? No, it doesn’t.

  • The Federal Funding rate does not impact mortgage rates. When the Federal Funding rate increases, rates go up on second mortgages, credit cards, car loans, etc.
  • Mortgage Rates go up and down along with the value of Mortgage Backed Security Bonds. To see plenty of previous posts on this topic, do a search for “MBS” in the “search this site” box in the upper right corner of the page.
  • The last time the Feds raised the Federal Funding Rate, Mortgage Rates improved. Rates are roughly 0.500% lower now than they were in December 2015.

So what to make of this? Don’t make home buying plans on what the Feds may or may not do. Don’t buy a home out of fear of rates going up. The best strategy is to get prequalified to buy a home, and purchase a home when the time is right for you… and not what the Feds or media dictates.

Looking to buy a home in Georgia? Contact me today. I’ll get you prequalified and get you ready for your home buying experience.

 

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Feds have opposite impact on mortgage rates

February 22, 2016

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Seems the increase of the Federal Funding Rate didn’t have the negative impact on mortgage rates that many of us read about/heard about in the media. Since the Feds increased the Federal Funding Rate, mortgage rates have improved by at least 0.375%. Mortgage rates now sit at their lowest point since the beginning of 2015.

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As bonds values go up, mortgage rates go down.

Why did mortgage rates improve if the Federal Funding Rate increased by 0.250%?

As previously discussed in this blog, mortgage rates are determined by mortgage backed security bonds. As these bond values trade, mortgage rates change… when bond values go up, rates go down and vice-versa. Also, when stocks endure bad times, bonds excel. This means as stock values drop, bond values rise, and in-turn, mortgage rates improve.

We all know what happened on Wall Street in January/early February. The Dow posted some historically bad numbers. Whether people were afraid of the price of oil, the oil glut, the Feds raising the Federal Funding Rate, or something else, stock prices plummeted, and so too did mortgage rates.

How should consumers respond:

  1. Don’t worry about interest rates getting better after you’ve locked in a rate. We have a float down option on our rate locks. If rates improve, your locked rate may be able to improve too. The rate will not get worse so long as it is locked. In other words, your rate could get better, but not worse. I’ve had several clients take advantage of this feature in the past two months.
  2. If you are thinking of buying a home (or refinancing), now would be a good time to get serious about it. Mortgage rates are not far off of their all time historic lows. Even if rates improve, you can use the float down option I just described.

Looking to buy/refinance a home in the state of Georgia, contact me today to get started. We’ll get through the prequalification process and get you ready to buy your new home!

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Is there a better day to lock a rate?

November 10, 2015

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Last time, we discussed how mortgage rates change. It isn’t from the Federal Reserve raising rates. Mortgage rates move up and down along with the value of mortgage-backed securities. As these bond values go up, rates go down – and vice-versa.

Is there a better day to lock a rate? I think a better question is this… how much volatility can you handle?

The two days of the week that see the biggest swing in mortgage rates are Wednesdays and Fridays. That isn’t a surprise since the Federal Reserve release their meeting minutes on Wednesdays. Those meeting minutes are definitely market changers. Fridays is typically the day when economic news is released – such as the jobs report. Again, this can have a big impact on interest rates.

Mondays are the quietest day of the week as the Fed doesn’t release any information on Mondays, and very few economic news releases come out on Monday.

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Do you like to hit at 17 when playing Blackjack? If so, then waiting to lock a rate until Wednesday afternoon or Monday morning (from Friday’s market changes) might be the way to go. Depending on the market that day, you may see rates get better (or worse) by 0.125%.

Don’t have the stomach for gambling? Want to think about a rate prior to locking? Then a Monday rate quote/lock is probably best for you.

Want to know more about rates, how they change, and why you should lock. Contact me today for more information. If you live in the state of Georgia, I can also prequalify you for your new home loan.

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The Fed holds, but rates went up?!?

November 5, 2015

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The Federal Reserve announced last week that it would not raise the Federal Funding Rate (again), which keeps the rate near 0% as it has been for years now. Guess that means mortgage rates won’t rise.

Well, a funny thing happened since the Fed’s announcement. Mortgage rates have gotten worse. Say what?!? If the Feds didn’t increase rates, why are mortgage rates going higher?

The answer is this – the Federal Funding Rate does not determine mortgage rates. Mortgage rates are determined on the value of mortgage-backed securities. These are a type of bond that trade every day like stocks. Their values can go up (and lower mortgage rates), or their values can go down (and increase mortgage rates). If mortgage-backed security bonds have a dramatic shift during the day, just like the Dow can, then we may see mortgage rates change more than once a day.

This means mortgage rates, like stocks, are driven by the market and not by the Federal Funding Rate. Remember the Quantitative Easing (QE) program from a year or so ago? This was the Federal Reserve purchasing mortgage-backed security bonds to increase their value, and lower mortgage rates. The Fed attempted to influence the rate market, and it couldn’t do that by simply lowering the Federal Funding Rate.

So what does the Federal Funding Rate actually impact? Great question! The Federal Funding Rate impacts car loans, home equity lines, credit cards, etc…. not mortgage rates.

Remember, next time you hear a news article about “rates going up,” it may not have anything to do with mortgage rates. Those can increase at any time depending on the market. More questions? Contact me today and I can answer them for you. If you live in the state of Georgia, I can also help you purchase your new home!

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QE3 is officially over

November 3, 2014

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As promised, the Federal Reserve ended their Quantitative Easing (also called QE) program last week. This wasn’t unexpected. Toward the end of 2013, the Feds announced they would begin tapering off their purchasing of bonds, which included mortgage backed security bonds (or MBS bonds). The Feds had several objectives in buying bonds, and one of them was to help push interest rates lower. They achieved that goal by purchasing MBS bonds. As the value and demand of MBS bonds increases, interest rates decrease.

The purpose of tapering was to prevent a financial market that was accustomed to the Feds purchasing bonds from freaking out by its sudden withdrawal. A practical example – the Feds were acting as though they were introducing a fish to a new aquarium. You keep the fish in the bag of water it was placed in at the pet store, and let the fish float in the bag of water in the new aquarium to get adjusted to the water temperature of its new home. If you don’t do this prior to releasing the fish, the shock could kill it.

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With the Feds officially out of the bond buying business, one of the instruments that helped interest rates reach historic lows is gone. Will interest rates rise? Most analysts thought rates would in 2014, but rates are a little lower now than they were in January 2014. That said, rates aren’t far off their historic lows from a couple years ago – meaning, rates have much more room to get worse than to get better.

One important point to clarify in the Feds statement. The Fed’s plan is to continue to keep short term lending rates near zero for the foreseeable future. Short term lending rates and interest rates are not the same thing. The short term lending refers to the Federal Funding Rate. Interest rates are determined by the value of MBS bonds, which change daily just like the stock prices of Apple, Google, UPS, etc. The Feds are no longer trying to influence MBS bonds now that QE3 is over.

What does this mean for those looking to buy a home? The simple answer is, we don’t know. Interest rates could stay the same or begin to get worse. Instead of knowing the Feds are in the background helping to keep MBS bond prices high, their values are now dependent solely on market factors.

If you are looking to buy a home or refinance, look to get started soon. Everyone has expected interest rates to rise the past few years, and they haven’t yet. Still, as I said earlier in this post, interest rates have a lot more room to get worse than to get better. If you are looking to buy in Georgia, contact me to get started.

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