Hi to all!

 Today the Federal Reserve Board cut Fed Funds rate by .50% to 3%.  Mortgage rates actually went up a little bit.  Why? 

 It is actually a little scary how often I see the so-called "experts" on CNBC state that lower rates by the Fed will lead to lower long term mortgage rates.  It is amazing how little these great financial minds actually know about how my vocation and industry work. 

So as a special gift to the members, I wanted to give a shout on the topic: 

The Fed controls short term rates and true in cutting rates the goal is to stimulate consumer buying.  However, what types of consumer spending are influenced by Fed rate cuts?  Today, the "Fed Funds" rate was reduced from 3.50% to 3.00%.  This following an inter-meeting move last week to lower this key rate by .75%, so this rate has been reduced by 125 bps (basis points or 1/100th of a percentage) since last week and now 250 basis points since October. 

The Fed funds rate is simply the rate that Federal Reserve member banks charge each other for overnight loans.  This rate influences short term money only.  Such as credit card rates, car loans, and home equity lines of credit.  It does not impact mortgage rates although mortgage rates are influenced. 

So here is how it works: 

The Fed cares about both inflation and economic growth. 

Mortgage Backed Securities are bonds.  A bond is a fixed instrument where the payment is fixed over time.  If the percetion is that inflation might be a problem in the future than obviously the price of the bond that has already been issued and sold will drop in value.  In other words, if I can buy two bonds today:  one at 5% or one at 5.25% which one looks more attractive if the price were the same?  Well, hmmm . . 5.25%.   So if the 5.25% is preferred than the price of that old 5% bond has to drop in price.  And vice-versa.  So in other words when we talk of the price dropping what that really means is that rates are increasing.  This is that "inverse relationship" those smart guys on CNBC talk about. 

Today for example, we saw the rate cut come into play and almost immediately I got an alert notifying me of moving bond activitiy.  The price of the real benchmark for mortgage rates is the Current Fannie Mae 5.50% bond; not the 10 year T-bond as I often here in the market.  Here is why:  the 10 year bond and the Fannie Mae bond move similarly but not always in the same direction.  For example in the month of January these two have moved in opposite directions 7 days.  So in other words if you were a loan officer advising a client on one of those days when you said float based on the 10 year T-bond and the Fannie Mae bond indicated a lock position, you either cost the borrower money, lost the deal, or both. 

Back to today:  I  saw the price of the Fannie Mae bond off by 19 bps today and we say a price worsening of .25% from investors about 20 minutes or so after the Fed rate cut. 

Here is why:  Inflation is really the only thing the bond traders car about.  When there is talk of a stimulas package and the Fed cutting by 1.25% in one week, and with the average inflation CPI at 4.1%, long term inflation becomes an issue and as such rates went up today. 

As a Certified Mortage Planner (CMPS), I pride myself on watching in real time.  Sadly, I see many loan officers reading yesterday's paper for advice on how to advise their client today.  This is purely a disservice to the consumer who so needs our help and professionalism right now. 

For more info, simply give me a shout:  mortgageplanner@247refi.com

Mike

916-813-4003