The Federal Reserve cut rates yes, but does that mean the mortgage rates are going down? Not in the short term. So lets look at why....
Heres a history lesson, when the Federal Reserve cut rates 13 times from January 2001 to July 2003, mortgage rates dropped 8 times and rose 5 times the month after each cut. So unfortunatley is not true that mortgage rates drop automatically when the Fed cuts rates. Mortgage rates go up and down according to investors' expectations of long-term inflation. Simply put: If investors think inflation will accelerate, mortgage rates (and other long-term interest rates) rise.
Alot of people think that mortgage rates are based on the 10 year treasury note, which in a sense is true, but not entirely. Mortgage rates are really based on mortgage backed securities (MBS), but to understand those you must understand where they come from.
There are 2 companies that are government sponsered enterprises called, The Federal National Mortgage Association (FNMA), otherwise known as Fannie Mae. And The Federal Home Loan Mortgage Corporation (FHLMC), otherwise known as Freddie Mac.
Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across America. They do not lend money directly to home buyers. Instead, they work with lenders to make sure they don't run out of mortgage funds, so more people can achieve the dream of homeownership. The lenders that Fannie Mae do business with are apart of the primary market, where loans are originated and the fundsd are given directly to the borrower and you start paying your mortgage.
Once a mortgage is originated, lenders have a choice. They can either hold the mortgage in their own portfolio or they can sell the mortgages to secondary market investors, such as Fannie Mae. When lenders sell their mortgages, they replenish their funds so they can turn around and lend more money to home buyers. That is where these MBS come into play. Fannie Mae issues these MBS in exchange for pools of mortgages from various lenders. These MBS provide the lenders with a more liquid asset to hold or sell. Fannie Mae MBS are highly liquid investments and are traded on Wall Street through securities dealers.
The same applies for Freddie Mac. Freddie Mac purchases mortgages from lenders and packages them into securities that are sold to investors. By doing so, they ultimately provide homeowners and renters with lower housing costs and better access to home financing.
In addition to financing housing through securitization, Freddie Mac invests directly in mortgages. This investment is made possible by their ability to raise money to purchase mortgage assets by selling bonds to investors throughout the world. By providing investors with another means to indirectly invest in mortgages on homes within the United States, they provide families with even more affordable mortgage financing.
By doing all of this, investors buy and sell these MBS on the secondary market which in turn depicts where the mortgage rates will be heading. So as I said before, the Fed Funds rate may have decreased but our rates will depend on what these 2 companies do, and if our securities dealers are in the mood to do some investing!
I know this is long, but I hope it was informative! Thanks for reading, and let me know If I can help with anything!!!!!!
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