Special offer

The Fed Rate and Mortgage Rate – What Does This All Mean?

By
Real Estate Agent with Marc It Sold!

the fedFirst a little history.  The Federal Reserve System (commonly referred to as The Fed) is the central banking system of the US and is made up of 12 regional banks.  The Fed manages the nation's money supply via its use of monetary policy.  This refers to The Feds ability to influence the availability of money and credit which affects interest rates and therefore the economy

Are we good so far?  For our purposes here we are going to have a limited discussion and only touch upon one area of the monetary policies. 

Banks are required by The Fed to have a certain portion of the total value of their demand accounts on hand.  If a bank falls below this level, it can borrow the funds from another bank that has a surplus with The Fed.  These are typically overnight loans.  The interest rate on these borrowed moneyfunds is determined by the banks themselves but is influenced by The Fed via the Federal Funds Rate.  These are more closely aligned with short term interest rates.  This is the rate that we've been hearing so much about in the news.  It must be understand that this is a target rate set by The Fed.  The rate that is actually paid by one bank to another is negotiated between the two parties.  This has nothing to do with mortgage rates. 

Now we come to mortgage ratesThe Fed DOES NOT control mortgage rates.  Mortgage rates are market determined and are on the long term end of the interest rate spectrum.  These are generally determined by the bond market.  It's a financial market where debt securities are bought and sold.  And this brings us to Mortgage Backed Securities.  You may not have heard of these specifically, but you've most likely heard of Fannie Mae, Freddie Mac and to a lesser extent Ginnie Mae.  Basically what they do is package many mortgages together and issue them as MBS's.  In order to get investors to buy these, they must pay rates of interest that are competitive with alternative interest-paying investments such as Treasury bonds.  There is a correlation between mortgage rates and long term interest rates.  Long-term rates are governed by the overall health of the economy, and the expectations of future growth.

As you can see one is long term whereas the other is short term.  So when you hear that The Fed cut the rate, you can not always expect an equal and immediate change in the mortgage rate.  In fact, in many cases the opposite has occurred.

 

For information on Central Florida, Orange County and Seminole County real estate and Central Florida, Orange County and Seminole County homes for sale in addition to Central Florida, Orange County and Seminole County relocation contact Marc Grossman, your Central Florida, Orange County and Seminole County Realtor @ 407-463-1034.  Additional information is available for Seminole County real estate, Orange County real estate, West Volusia County and South Lake County.

Central Florida Homes for Sale, Real Estate, Realtor and RelocationTo learn more about Marc and the services he has to offer, visit his profile & website

Marc Grossman, GRI  -  http://www.OrlandoHomes-4u.com/  -  407-463-1034

Marc donates 10% of his net proceeds to Hospice of the Comforter.

Marc It Sold!

Comments (44)

Christy Powers
Keller Williams Coastal Area Partners - Pooler, GA
Pooler, Savannah Real Estate Agent
That was a wonderful post. You broke it down great. I definitely need to brush up more on the Fed and such.
Feb 09, 2008 05:05 PM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

Fantastic Mr. Grossman!  SOMEBODY should post this in a major media publication and put it on the first page...right beside all the other Mortgage News going around.  Well studied and well put man, you taught me a little bit of something....

Belonger was right in flagging this, wonderful 'freaking' article.  We really could structure a College Course around this very entry into the Blogosphere.  Yet, I'm sure you are like me...why wait for College?  Good work Mr. Marc!

Feb 09, 2008 06:30 PM
BLR Guy
BLRGUY(Beach & Luxury Realty Inc) - Saint Pete Beach, FL
Congratulations on the feature post Marc!smileysVery well done post as always!
Feb 09, 2008 10:52 PM
Matthew J Blum - (retired from the business)
Palm Beach Gardens, FL
Marc, The Feature Star really looks good on you. You really deserve it. This post really explains it very nicely.
Feb 09, 2008 10:56 PM
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker

Richard - And it's not as complicated as some may think either.

Freddie - Glad this helped you.

Wayne - Thanks, but people needed to really know that there isn't a relationship between the two.

Lisa - What this 'even by me' crap.  I don't believe that for a minute. 

Bernie - Go for it.  I hope that it'll help.

Rob - Thank you, but I think it's important for all of us to know this info.  As realtors we need to understand these concepts and how they relate to our industry.

Adam - You are exactly correct and thank you very much.

Joey - Thank you for that compliment.  I tried to keep it simple and concise.  Bang away.

Trace - And it's all of our jobs to understand the difference.  How else can we explain it to others.

Brian - Thank you kindly.

John - I could try...  Glad you like my neck of the woods.

Christy - It's so very important and quite interesting.  Thank you.

Jason - Thank you, thank you, thank you.  I humbly bow before you!

BLR Guy - Thank you.

Matt - Thanks, that's so kind of you.

Feb 09, 2008 11:35 PM
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker
Robert,  Thank you very much, but you should alter your signature.  I don't think it abides by the AR rules.
Feb 10, 2008 12:10 AM
Emily Lowe
RE/MAX Homes and Estates, Lipman Group - Nashville, TN
Nashville TN Realtor
Good explanation - thanks!
Feb 10, 2008 01:00 AM
Robert L. Brown
www.mrbrownsellsgr.com - Grand Rapids, MI
Grand Rapids Real Estate Bellabay Realty, West Mic
Good information. Quite a bit to take in all at once. Thank you.
Feb 10, 2008 01:25 AM
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker

Emily - Glad you enjoyed.

Robert - Thanks.  The links should also help to possibly better understand how all this works.

Feb 10, 2008 03:42 AM
Jan Wood
None - Gallatin, TN
Marc:  Great post... like Lenn said, we'll have to wait to see what happens with MBIA.  
Feb 10, 2008 10:18 AM
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker
Jan - I agree, but it's not going to be a pretty sight.  And goodness knows what kind of fallout we are going to see from that.
Feb 10, 2008 10:43 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Marc,

Congratulations on the feature.  Well explained!

Mike in Tucson

Feb 17, 2008 02:56 PM
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker
Mike - I appreciate that coming from you.
Feb 17, 2008 11:34 PM
Anonymous
Jeff
I'm glad someone understands how things work and I'm especially happy that even the common man can understand your explaination. Great job! Thankls! 
Feb 21, 2008 12:38 AM
#40
Rick Kellow
Cherry Creek Mortgage - West Bend, WI
FHA & Reverse Mortgage Expert

Marc,

Great post... I'm printing this out and giving it to my customers that asked about rate adjustments and the fed cuts rates... real pro job... thank you...

Rick

Feb 21, 2008 12:58 AM
Sherri Sherpy
iLoan
NMLS #287770

Marc,

This is awesome detail!  Thank you for setting the record straight.

Feb 21, 2008 01:37 AM
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker

Jeff - Glad this could be of assistance to you.  Thanks for the compliment

Rick - Be my guest and thank you.

Sherri - I felt that it had to be done.  I realized that not only is it confusing to the general public that also realtors are confused as well.  This is something that we should know to be able to properly assist our clients.

Feb 21, 2008 01:59 AM
Matthew Rosov
Amerisave Mortgage Corporation - Laurel, MD
Certified Mortgage Planning Specialist
Allow me to chime in here and say that it's good to have someone else agree with what is correct and true!
Feb 23, 2008 05:18 AM
Jonas Kruckeberg
First Priority Financial - Temecula Murrieta Mortgage - Temecula, CA
Temecula Murrieta Mortgage

Excellent explanation of the Fed rate and interest rates!

Jun 26, 2008 05:36 AM
Marc Grossman
Marc It Sold! - Longwood, FL
GRI, Greater Orlando Real Estate Broker

Jonas - Thank you very much!!

Jun 26, 2008 07:47 AM