Federal Reserve Cut Has Little Benefit For Mortgages

From Matt McHugh at The Private Bank:

As we have seen all year, when the Federal Reserve cuts it's benchmark Fed Funds rate as it did this past Wednesday bringing that rate to just 1.0%, mortgage rates rose slightly. Contrary to consumer expectations, these two lending rates are technically unrelated, although Fed cuts do have a larger impact on the economy which will eventually affect mortgage rates, we just can't be certain what that impact will be. Over a longer term (say several months) mortgage rates should mirror changes to Fed Funds rate, so we have reason to believethat lower mortgage rates are in our future.

It is interesting to note that the last time Fed Funds was at 1.0% was June 2004. The 30 year fixed rate was around 5.5% and the 3 year ARM was just 4.0%.

A second factor also contributed to this week's rise in mortgage rates. The federal government's takeover of Fannie Mae and Freddie Mac in September left mortgage investors with the impression that there was explicit government backing of the debt and guarantees issued by Fannie and Freddie. Government officials have been sending mixed messages, however, raising some concern about whether the two companies really will have the long-term backing of the government. Due to the uncertainty, investors, particularly important foreign investors, have been reluctant to invest in Fannie and Freddie guaranteed mortgage backed securities. Yields required by mortgage backed security investors directly affect most mortgage rates. If the government were to unambiguously convince investors that it will stand behind Fannie and Freddie guarantees, then mortgage rates could be expected to move lower.