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The Mortgage Bankers Association (MBA) reported today, that total mortgage applications spiked 48% last week following the Federal Reserve’s move to cut short term interest.

The index that tracks refinance application actually went up 82.2%, while purchase loans were up 10.6%

What I’d like to know is what percent are FHA loans.  The reason for this is the FHA loans are going to be able to help out those behind on their current mortgage payments.  While conventional loans aren’t going to be able to help those currently in trouble.

One of two things are happening, either many people (more…)

What?  The Fed lowered the Fed Funds rate today .75% and mortgage rates went up?  Yep, that’s right.  That doesn’t make sense.  I thought if the Fed lowered rates, mortgage rates would follow?  Nope that’s not how it works.    

 ”Mortgage rates frustrates buyers” was a timely article in the Denver Post this past weekend and it’s a must read for every current and prospective homeowner.   The point of the article, the Fed does not determine the direction of mortgage interest rates.   Plain and simple.  http://www.denverpost.com/business/ci_8580045

So, when the Fed lowers or increases rates, what exactly are they doing?  They are increasing or lowering the Fed Funds Rate - not mortgage rates.  They lower the Fed Funds rate to stimulate the economy and raise the Fed Funds to slow things down.  The Fed’s #1 job is to prevent inflation, but in general they are responsible for keeping the economy humming somewhere between recession and inflation - not an easy task.  Why? the Fed “cuts” or “increases” typically take 6-9 months to trickle through the economy and it’s not an exact science.  

What you need to know is that mortgage interest rates are determined by the price of Mortgage Backed Securites.  These financial instruments are traded daily and as their prices increase, interest rates come down and vice versa.  These mortgage backed securites are very sensitive to economic data, especially the actions of the Fed.  The MBS trade throughout the day, like stocks, which is the reason mortgage interest rates can change without notice.  A 30 yr fixed loan can be 6% in the morning and 6.5% by time you get back from lunch.  I’m not kidding.  It happened several time this past month.  The markets get wind of an inflationary report or rumor and BOOM, the selling begins and rates jump up!  It’s not a lot of fun explaining that to a client when they didn’t take your advice to lock in the morning.  There’s a lot of volatility in the MBS market.

Mortgage rates have actually increased the last six times, including today, that the Fed has cut the Fed Funds rate.  Why?  Inflation is the number one enemy of mortgage backed securites as it erodes the value of these instruments.  Traders are always fearful that the Fed will over stimulate the economy by lowering rates too much, thus causing inflation 6-9 months down the road.  In order to protect their investment they like to “sell” their MBS after a Fed rate cut, flooding the bond market with mortgage backed securities, prices drop like a rock and interest rates spike up.  It can happen in minutes.  In fact, as I write this, MBS have lost 90 basis points.  Yesterday they were up 150 basis points.  Yesterday was the day to lock.  I had a few clients that listened to me. 

What can you do?  First, read the attached article several times so you really get it!  Second, stop listening to your parents, friends, co-workers, neighbors and all the other experts in your life giving free financial advice about the direction of interest rates.  Don’t worry, you are not alone, I have plenty of those experts in my life too.   Third, stop gambling with your money and thinking that mortgage rates might drop if the Fed lowers the Fed Funds rates.  You have better odds going to Vegas.   

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