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.
“Fed Day” always brings much anticipation and fanfare. From market participants and traders to the media, and even individual opportunists – everyone tries to digest the Fed action, and to scrutinize the statements and comments to determine any future policy changes or bias shifts. Of course, as the market faces a unique market transformation, every aspect of the Federal Reserve meeting is dissected, causing extreme market volatility until things settle back down.
As anticipated, once again, for the third consecutive meeting, the Federal Reserve cut its target rate by 25 basis points to bring the Fed Funds Target Rate to 1.50 – 1.75. The Fed move mirrored rate cuts in July and September and was largely anticipated by market participants. While I feel that this news and information is starting to become monotonous and uninteresting, it’s never surprising to see how many people do not understand the fundamentals of these “rate cuts.”
Unfortunately, there is a widespread and very wrong misconception that following a Fed rate cut mortgage rates go down. As my active clients and hopefully readers know by now from previous discussions on this topic, the Federal Reserve does not control mortgage rates whatsoever. The Federal Reserve does control important gauges such as the “Fed Funds Rate,” which ultimately influence other market indices, but that is the extent of their power in this regard. The Fed Funds Rate is the overnight interest rate at which depository institutions lend to other depository institutions.
While I can’t fault the average consumer and homeowner for not knowing these subtle differences in market indices, I do find it shocking that the media still gets it wrong. Immediately following the Fed rate cut announcement, I received several emails and notifications from leading news agencies, including CNN and Fox Business, noting that the move will have an immediate benefit to consumers on their current mortgage rates. One highly regarded news agency even went as far as saying, “For consumers, lower interest rates — which affect borrowing costs, including auto loan rates and 30-year-fixed mortgage rates — can mean thousands of dollars in savings.”
Reporting, such as in the example indicated above, is completely inaccurate. At best, the only actual impact for homeowners is to those with home equity lines of credit that are “prime” based rates. The Prime Rate is typically three percentage points higher than the published Fed Funds Rate. After the Fed changes the Fed Funds Rate, the Prime Rate will change at the beginning of the subsequent month. Many high rate credit cards are also Prime-based and would see a benefit as well.
While homeowners benefit by receiving a lower rate on their prime-based loans as indicated above, longer-term rates, such as fixed mortgage rates, do not necessarily act in accordance. By the time the actual announcement is made, the market had already more than adjusted the pricing on short-term and long-term bonds. After a Fed rate cut, these mortgage bonds often become less desirable, and typically more expensive. This is because bondholders now require a higher yield in return for their bond investment, thus driving MBS pricing and mortgage rates higher. The fact that the Fed needs to act to try to stimulate the economy and spark inflation is a concern, not a bonus.
What remains to be seen and experienced is just how soft, and weak the economy is, which would actually benefit long term rates. Federal Reserve Chairman Jerome Powell declared, “We will act as appropriate to support continued growth, a strong job market, and inflation moving back to our symmetric 2% objective.” That could bode well for rates if you believe the economy is weakening – as I do.
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