Tuesday, March 18, 2008

On FED Watch. Mortgages up or down?

Mr.Mortgage is on FED watch this morning as this may have positive or negative implications for clients. When the Federal Reserve lowers the Fed Funds Rate, mortgage rates tend to increase, and it's always for the same, few, related reasons:

Rate cuts create long-term inflation pressure. Bought gas or food lately?
Rate cuts makes the U.S. dollar weaker.
Rate cuts reflect short-term economic weakness

But rate cuts are just one way that the Federal Reserve can impact mortgage rates; there's more than one color in the Fed's crayon box, after all.
How the FOMC treats the Fed Funds Rate today is only one part of the story. The other part is what the Federal Reserve does to make mortgages feel "safe" to market investors.

One reason why mortgage rates are slightly down this past week is because the Fed has intervened with normal market activity on multiple occasions and with each intervention, the Fed is implicitly or explicitly saying, "We will not let conforming mortgage debt default."
This "guarantee" from the Federal Reserve reduces the risk of mortgage loans sold through Fannie Mae and Freddie Mac. Lower risk = lower rates.

What the Fed says today will be as important as what the Fed does. If the press release reveals a proclivity for guaranteeing additional mortgage debt, expect mortgage rates to fall because mortgage debt will be considered "safer" for investors. The jumbo loan market will key off the conforming market.