There are a lot of words here.  If you have a mortgage you might ever refinance (and especially if you think Sunday’s emergency Fed news means you can now get a lower rate), read every last one of them.

Background: Fed’s Emergency Rate Cut and QE

It’s extremely important for the sound functioning of the mortgage market that consumers read and understand the following: THE FED DID NOT JUST CUT YOUR MORTGAGE RATES!

I’m not a loan officer.  I don’t play one on TV.  I don’t benefit from the decision you make on locking a mortgage rate.  I’m just a guy who watches and understands the day-to-day movement in average mortgage rates better than just about anyone.  It’s one of the few things in this life I will claim to be the best at.  You can take what I’m saying to the bank, literally and figuratively.

I can’t count the number of articles I’ve written or the variety of ways I’ve reported mortgage rates moving in the OPPOSITE direction as a Fed rate cut/hike, or simply staying put despite a Fed cut/hike.  Here’s a recent example from March 3rd.

The extent to which consumers and especially financial news media (who should REALLY know better by now) mistakenly believe the fallacy of the Fed dictating mortgage rates is truly unfortunate.  Even now, you’re reading this article and some of you will still be contacting your originators asking if you can get a lower rate.  But it doesn’t work like that.  I urge you to avoid buying into misinformation.  Make an effort to elevate your level of understanding.  Start here:

Part 1: The Fed Funds Rate Itself

The Fed funds rate doesn’t directly affect any mortgage rates apart from home equity credit lines.  While it often moves in the same direction as the traditional 30yr fixed mortgage rate in the long run, there are months and even years of time when they seemingly have nothing to do with each other.

This makes sense for a few key reasons. The Fed Funds Rate is a different animal than the mortgage rate.  It applies to loans with a term of up to 1 day.   That’s a far cry from the average mortgage, and investors approach those loans with completely different sets of priorities.  That’s why we sometimes see longer and shorter term rates move in OPPOSITE directions (which accounts for the “inverted yield curve” phenomenon that made news in 2019 when 10yr Treasury yields were lower than all of the short-term rates under 2 years, including Fed Funds).

But even if long and short term rates always moved in the same direction, there’s a more important reason that mortgage rates might not follow the Fed.  The bonds that dictate mortgage rates trade thousands of times a day.  Mortgage lenders themselves update their rates at least once a day.  In contrast, the Fed only meets to consider changing its rate 8 times a year, barring emergencies (like today).  This means mortgage rates can and do move well in advance of Fed rate changes.  Indeed, the behavior of longer-term rates like mortgages can often predict the market conditions that prompt the Fed to make a move.

Bottom line: the bond market (which includes mortgages rates) has been able to react to coronavirus implications for weeks, and the fed is just getting caught up to market realities.  They’re a battleship in a river, and that river has been swift.  If you need more convincing on this particular point, here is a more detailed conversation.

Part 2: What About the New QE?

QE = Quantitative Easing (the term for the Fed’s large-scale bond buying programs designed to lower interest rates and encourage free flow of lending/capital).

If you’ve been reading part 1 and thinking to yourself “ok smart guy, but what about the new mortgage bond buying the Fed just announced today?” Congratulations!  You understand more than 99% of the population about what matters.  The Fed did indeed announce new mortgage bond buying as a part of its QE package today.  This will help restore the correlation between 10yr Treasury yields and mortgage rates, but it WON’T immediately restore the normal space between the them.