Why Fed Rate Cuts Do Not Equal Lower Mortgage Rates

This is a copy of an email that came to me from Keith Borngesser of Mortgage Bankers of WI:

By Barry Habib, CEO

Last Updated: February 28, 2008

The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent five Fed rate cuts. This is difficult to explain to consumers who have watched a 2.25% reduction by the Fed with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.

It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.
The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.

Now let’s take a look at what happened with the Fed’s most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a “knee-jerk” reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. So far this year, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp. Within 13 days from that 50bp cut, mortgage bonds lost 269bp.

Keith then closed the email by saying:

Remember that a loss in bp(basis points) means an increase in mortgage rates. As volatile as the market is right now I do not want to forecast too much, but the experts are looking for short term lowering of mortgage rates.

Have a great weekend.

Keith

Keith Borngesser
Mortgage Bankers of Wisconsin
16655 W Bluemound Road STE 330
Brookfield, WI 53005
262-784-6600 x 224
262-784-6699 fax
262-391-9450 mobile

About me

This is the launch of my blogging! I have decided to blog about real estate to hopefully reach out and help people for all their real estate endeavors. The Internet is a great source of information, and today the majority of home buyers and sellers will search online first before contacting a real estate agent. My intent is to be your online source...your "online real estate agent" who's here to answer questions, give you valuable information, websites to visit, all without being that "harassing" real estate agent! No one wants to be bothered, and I understand that.

So, why me? Here's some information about myself...

I am a licensed real estate agent with Century 21 Reich & Roberts Associates. We are located at 161 West Sunset Drive in Waukesha WI. This office has been servicing Waukesha and surrounding counties for around 40 years.

I personally have been involved in real estate for almost 4 years. I started off reading and learning about investing in real estate. The book that got me going is none other than Rich Dad, Poor Dad by Robert Kiyosaki. I chose this broker (Dick Roberts) at this Century 21 office to be my agent because of his vast knowledge in the local housing and rental area. One of his first questions he asked me was "Are you interested in becoming an agent?", to which I quickly replied "No!". I didn't think I could do those 'crazy realtor hours'! Well, after a few years of searching, and searching, and researching, and running numbers, viewing hundreds of duplexes, triplexes, single family homes, making offers, counter offers, and accumulating 3 rental properties, I decided that yes, I am interested in becoming an agent! I was previously a stay at home mom with no idea of what I would do once the kids got older. I wanted to contribute financially to the household, which is why I decided to get into real estate investing. And after doing those 'crazy realtor hours' inadvertently for a few years, I was able to realize that this was my calling. This was my passion. I loved the research, the hunt, the crunching the numbers, the negotiating, and finally the accepted offers.

In March of 2006 I obtained my real estate license. Since then I have also acquired my ABR Designation. The Accredited Buyer Representative Designation is a nationally recognized designation awarded by the Real Estate Buyer's Agent Council, Inc. (REBAC) to REALTORS who meet the specified educational and practical experience criteria.

I am also a REALTOR (registered trademark, sorry I haven't learned how to make this symbol yet, any help would be appreciated!) Only real estate agents who have chosen to join the National Association and abide by its strict Code of Ethics can call themselves
REALTORS(registered trademark).

All of my affiliations are:
National Association of REALTORS (NAR)
REALTOR(registered trademark) (someone help me please!)
Wisconsin REALTORS(R) Association (WRA)
Women's Council of REALTORS(R)
Real Estate Buyer's Agent Council Inc. (REBAC)
Wisconsin Apartment Association (WAA)
Waukesha Area Apartment Association (WAAA)
Metro Milwaukee Multiple Listing Service

I hope this sets a good background of myself and why I do what I do. Any questions or comments are welcome!

Be sure to visit my website at http://www.sarah-steelman.com/ !