Truth- Why Lowering the Fed Funds Rate Does Not Lower Mortgage Rates

Mortgage and Lending with Franklin Advantage Inc. NMLS Lic. # 343946



The public as a whole, and Realtors really need to get their facts straight.  It's really not the public's or Realtors fault, but more-so the misinformation in the media that is the culprit.  Almost everyone thinks that every time the Fed Lowers the Fed Funds Rate that this means that Mortgage Rates are automatically Lowered.  That's what they hear or read in print or social media, or television.   But that so called fact can't be Further from the Truth.  And talking about Truth, there are even inexperienced or misinformed lenders and loan officers that push this misinformation.


For people like me who are in Mortgage finance and have been for many years, this drives me insane.  I always attempt to educate my buyers or refinancing clients when taking a new mortgage loan application regarding interest rates, and depending on what's happening in the market, whether or not they should consider locking their rates.


Yet, for those clients who choose to float instead of lock, whenever the Fed lowers this rate, my phone rings off the hook.  They always say, " I hear the Fed Lowered their rate, can we get a much lower rate now?"  Or those who have locked call saying, " Gee, I hear the Fed lowered their rate, can we renegotiate a lower rate?"


I always have to remind them of our initial conversation at application, but most I'm sure are thinking they are talking to a Man on the Moon or someone full of You Know What.


So What is the Fed Funds Rate?


Per definition at Wikipedia:

In the United States, the federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve to maintain depository institutions' reserve requirements.

Fed Fund Rates are basically Short Term Rates.  

Mortgage Rates are Long Term Rates, and are determined almost exclusinvely by the Yields on 10 Year Treasuries AND Mortgage Backed Securities.

Rather than put you to sleep with Lender speak, in a nutshell and in the Simplest Terms........

Mortgage rates closely follow 10- Year Treasury rates and Mortgage Backed Securities as indicated above.  Mortgage loans that are made by lenders, whether banks or mortgage bankers, are Bundled in Mortgage Securities and Sold to other Investors, Other banks, Fannie Mae, Freddie Mac, Ginnie Mae, pension funds, insurance companies, etc.  As these investors purchase these securities, these lenders are repaid and then make more mortgages.  The Secondary Market where these securities are sold is a Trillion dollar market.


*** One other tidbit of information that is really special is that when Economic news is Good, Stock prices normally Rise AND Treasuries Yield Rise ( When Stocks Rise, in order to complete for funds for Treasuries vs Stocks, Treasury Yields have to Rise... Therefore Increasing interest rates for Mortgages.  Note:  What really Controls rates are the MBS's.....Mortgage Backed Securites.  They TEND to follow Treasuries, but the frustrating part is when Trasuries Fall, MBS's usually lag behind due to the fear of early pay-offs on refinances which is Unprofitable for Investors.  However and even more frustrating is that when Treasuries Rise, Look Out MBS's react almost Immediately.

Conversely, when Economic news is Bad, Stock Prices normally Fall.  And thus, Treasury Yields typically fall as well........ which typically Lowers Mortgage rates.***Again, See Comment above about MBS's that Actually effect mortgage rates, moreso than Treasuries.

Confused?  Don't feel bad.  Most people are.

If you really want a a better written explanation, go to this article link from Mortgage News Daily which also has reference to TWO other great articles that explain this phenomenon:


Higher Mtg Rates Despite Fed Rate Cut- Here's WHY


Bottom Line, next time a client asks you about whether rates are going to Drop if the Fed Lowers the Fed Funds rate..................... Refer them to a knowledgeable loan officer.


Photo Coutesy of Jesadaphor/



Posted by


Wayne L. Brown, NMLS # 343946
Licensed Mortgage Specialist
Franklin Advantage, Inc.
Direct: 858-997-6300

Online Application:



L/O CA DRE LIC. # 00906571

Corp. NMLS # 285786

CORP CA DRE LIC. # 01837286


Equal Housing Lender


About Wayne Brown


Wayne is a Licensed Mortgage Banker, and is based in San Diego.  With over 35 years in commercial and mortgage banking, he serves all of California and has closed more than 5,600 loans in his career.


He specializes in Conventional, FHA, VA, and Reverse Mortgages for residential lending purposes.  Both he and his company always strive to exceed each client's expectations through knowledgeable, ethical, and transparent representation to service their financial needs. 


Contact Wayne for a Free and Confidential mortgage analysis and pre-approval without obligation, or to simply get answers to your mortgage questions.  Wayne can be reached directly at 858-997-6300.

Equal Housing Lender                     

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