The Feds cut rates but mortgages don't follow; why?

What can the Federal Reserve really do to effect the current mortgage rate?

Not that much!

We get excited when we hear something about the Fed lowering interest rates. It seems only logical that mortgage rates are immediately going lower too. A mortgage interest rate is not the same thing as the Fed rate.

Other names for the Fed rate are short term rates, prime, Fed funds rate. This interest rate is the one tied to your car loans, credit cards, and home equity lines of credit. Even though a home equity line of credit is considered a mortgage, it is amortized like a credit card. That is the only mortgage product affected by the Fed funds rate or Prime.

Mortgage rates are indirectly affected by the Fed moving rates. When the Fed makes a rate move it is felt by the investors. Some of these folks invest in mortgage backed securities. It is the mortgage backed securities that move mortgage rates up or down.

The Fed makes rate decisions on what is happening in the market. The unemployment number, consumer confidence, consumer price index, etc. are just some of the economic indicators that are used to decide if a rate change is needed.

These same indicators are what affect the mortgage backed securities which in turn affect mortgage rates. Every day the market is examined using the economic indicators and a rate is established for the mortgage backed securities.

This happens whether the Fed is active or not. A good indicator of where mortgage rates are going is by watching the 10 year bond. When there is bad economic news then that often means good news for the mortgage market.

Investors get nervous when a bad economic indicator shows up, and they take their money out of the stock market where they feel their money may be at risk and put it into a safer place like the 10 year bond. When money floods into the 10 year bond it drives the price up but the yield down. When the yield is down then current mortgage rates go down.

When there are good indicators and news the investors take money out of the 10 year bond and put it back into the stock market. They can make a better rate of return in the stock market then in the 10 year bond. When they feel safe that the economy is rebounding then the stock market is the place to be. The 10 year bond price goes down and the yield goes up so mortgage rates go up.

by Rob K. Blake author of the BUILD System