Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
This past Wednesday brought us another historic Federal Reserve action-packed day. At the final Federal Open Market Committee meeting of the year, the last by departing Chairperson Janet Yellen, the Fed hiked (increased) rates 0.25% as expected. The Fed also noted that it expects three additional increases next year. (Although, it is important to know that there are many new faces in the Fed next year, and many of the current members may not be voting, so this might change). Additionally, their unemployment target has dropped from 4.0% to 3.9%, and they forecasted a 2.5% GDP next year. Another hot-topic of the Fed is Inflation, and new commentary highlighted that inflation declined this year, much to the chagrin of the Fed, but they expect a 2% target next year. The inability to move inflation seemed to be Yellen’s biggest regret as Fed chair.
The day also brought word that a tentative agreement was reached by the House and Senate on a tax plan. Amongst other more public details, highlights of that plan include a 21% corporate tax hike and a potential change in the tax deduction for capital gains when selling a house. These are important and not often publicized items to keep an eye on. Fed Chairperson Yellen did remark that there is no way to know yet with certainty how, or if, this tax plan will impact the economy.
All in all, almost everything was as-expected, and the stock market further rallied after the announcement, closing the day at another record breaking historic high. (No further commentary by me on that phenomenon, at this time). As a result of the move, all short-term interest rates controlled by the Fed will increase 25 basis points. The psychological impact of the increase, the third in 2017, may be dulled as consumers grow conditioned to such moves. It is important to remember that before the ‘great recession’ the Prime Rate was over 8% on average for a very long time. We are certainly moving in that direction.
As I have written about in the past, there is a very common, and very wrong misconception that following a Fed rate hike, mortgage rates will go up. As I have successfully guided my clients in the past, more often than not, mortgage rates tend to go down following a Fed rate hike. The reason for this is because when the Fed increases short term rates it helps curb inflation. Inflation erodes the value or buying power of a Bond’s fixed return. If inflation is rising, those who hold longer maturity bonds, such as mortgages, need to be compensated more. This causes rates to increase as inflation increases. With the Fed helping to curb inflation, this is seen as favorable in the bond markets.
I was speaking with a potential new client about an hour before the Federal Reserve decision, and he was extremely anxious to move forward with the loan, and lock in his rate before the Fed announcement. I tried to explain the past historic impacts and my analysis of these Fed hikes over the past two years, but he was uncomfortable as to whether to take the risk. I offered him a unique “Interest Rate Limit Order,” which is that our Rate-Lock Desk would lock him in immediately at the agreed upon rate if the market starts to sell off, but our lock desk will not lock him in if rates look like they might improve. This is something available exclusively to us, and something many of my clients have benefited from recently.
Needless to say, with the bond market rallying after the meeting, we were able to offer him a better option than earlier discussions, and he moved forward with the improved rates and terms. Where we go from here is anyone’s best guess. I cannot emphasis enough how the personal guidance of a competent and knowledgeable mortgage advisor can make a tremendous financial and emotional difference.
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