For the Real Estate transaction attorneys in the firm, we receive a fair number of inquiries about mortgage rates; particularly when the Federal Reserve is about to make a change – up, down or sideways. But the prevailing question we receive, which is likely due to the prevailing misunderstanding about the Fed and mortgage rates, is the question inquiring if the Fed actually sets mortgage rates. When the Fed decides to increase or decrease the Fed funds rate, there is the presumption that mortgage rates will do the exact same thing. The short answer is that the Fed does not set mortgage rates. The Federal Reserve sets borrowing costs for shorter-term loans in the U.S. known as the federal funds rate. This rate governs how much banks pay each other in interest to borrow funds from their reserves kept at the Fed on an overnight basis. Whereas mortgages track the 10-year treasury rate, which are simply government issued bonds that have a 10-year maturity date.
That said, it goes without saying that when the Fed decides to make a change, that change reverberates throughout all financial markets and is reflected in the relevant indices. These Changes to the federal funds rate can impact the 10-year Treasury (by impacting yields), but there is certainly no guarantee that this will happen. Which is ultimately to say that there isn’t an automatic correlation between mortgage interest rates and the Fed funds rate. Investors will take their queue from the Fed regarding speculation and will make their investments accordingly. The impact of these investments – which is largely tied to investor sentiment and the geopolitical environment – will have a much more significant impact on mortgage rates. The Fed also influences mortgage rates through monetary policy, such as when it buys or sells debt securities in the marketplace. Buying or selling debt with either increase or decrease the money supply in the marketplace. When there is more liquidity (Fed buying bonds), this flow of credit will supply downward pressure on mortgage rates, causing them to improve. Whereas, if the Fed decides to ‘taper’ its bond purchasing, credit dries up and upward pressure is suppled.
For some time now the Fed has been steadily purchasing mortgage-backed securities. The market is expecting that feverish buying to wane in the coming months or years, much like the summer of 2013. When this happens, and it will happen, mortgage rates will increase. If you find yourself on the sideline waiting to purchase a new home or refinance an existing mortgage, pay attention to what the Fed is doing with its purchasing of mortgage-backed securities. When this begins to decline, or in “Fed-speak,” taper, you may be in for a significant waiting period if you’re expecting rates to return to their all-time historic lows. The information provided in this article is strictly that; informative. It is not intended to be used or taken as legal advice. Each fact pattern is unique and there are always nuances that must be taken into consideration and analyzed prior to a complete legal analysis. Should you find yourself in need of such analysis, or analysis regarding any other real property or mortgage-related matter, the attorneys at Attorneys Real Estate Group, APC are here to help.