The Federal Reserve and Mortgage Rates

Mortgage and Lending with Emery Federal Credit Union
Consumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.

The Federal Reserve affects short-term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage-backed securities, which trade on a daily basis. The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds.

Stocks and bonds compete for the same investment dollar on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage-backed securities.

Unfortunately, selling mortgage-backed securities to fuel stock market rallies causes interest rates to go up, not down.

Historically, there have been many times when the Federal Reserve has increased interest rates. Stocks then sell off in fear that the increase will affect corporate profit margins, and the liquidated stock assets need a place to park until the next rally comes along. The safe haven is found in mortgage-backed securities which cause mortgage rates to drop.

The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. I make it a point to continuously monitor interest rates for my clients, and advise them of opportunities to manage their mortgage debt at a better rate. This is the foundation of my business model as a Trusted Advisor.

Let's discuss how we can better educate our clients on the largest purchase they'll ever make!

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Rick Grand
nowhere - Eugene, OR

I read a similar post to this and that I responded too. The thing I dislike the most is how the media affects so much. I'll have clients read the paper and call me freaking out thinking they are doomed and a simple "that situation doesn't affect you" usually calms them down. I know people try to be informed which is great, I enjoy when clients are in the know when it comes to real estate and mortgages but I think the media tends to mislead the public but at the same time that is the information people rely on for their knowledge.

If I want to learn about something I'm not the type of person to listen to the media. I'd rather contact a professional in that field to learn from. It just makes sense to me.

 Ways to better educate them? I usually tell them to not buy in too much to what the media is reporting. They are always talking national figures and those can be skewed compared to YOUR area. Depending on their situation (and if they really want to stay on top of things) I'll try to tell them what to watch for their situation. But yes, I'm always open to more ideas of how to inform and educate my clients so I hope more people respond to this blog!

May 03, 2007 10:34 AM #1
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Kevin Phillipson

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