As many of you have heard, the Federal Reserve lowered the Fed Funds Rate to 0%. This was done due to the urgency of what the U.S. is facing. Here are some basic details on how this impacts mortgage rates and what we might see in the coming weeks and months ahead.
Federal Reserve Actions
- Lowered the rate banks charge each other for lending money overnight (short term loans). This will impact short term loans such as car loans, credit cards, the Prime Rate, etc. This rate is not directly tied to mortgage rates as mortgage rates are long term loans/rates 15 Year, 30 Year, etc.
- Buying Treasuries & Mortgage Back Securities at $40 Billion dollar installments (Totaling $700 Billion over time). This will help bring money into the system and allow banks to lend freely and provide cash to those account holders withdrawing money.
- Cut the government mandated requirement to hold 10% of deposits on reserve. Now banks do not have to hold this much in reserve further freeing money for loans and cash withdraws.
- Stopping the selling of its own portfolio of mortgage loans allowing for even more cash to enter the system.
Why are mortgage rates higher with all that the Fed is doing?
- Interest rates for mortgage loans will come back down but not immediately. Here are a few reasons why.
- Bank capacity is a problem. There are approximately $11 Trillion mortgages in the US and let's say half of them could have an opportunity to refinance. That would be $5.5 Trillion. In a great year, $3 Trillion in mortgage are done. Note the word YEAR. If half of those are refinances, that is $1.5 Trillion. This is in a year and a very busy and productive year. Could the banks do $2 Trillion? $2.5 Trillion in a year....maybe but they cannot do $5.5 Trillion in a month which is what the market was calling for.
- Think about it - if Apple just releases their latest and greatest product and there is a line 6000 deep around the corner to purchase it - they do not put it on sale.
- We need capacity to be freed up which is happening every day with every lender which will result in lower rates in the future.
- As shown above by the Fed's actions, liquidity has been an issue. There is simply not enough money available to lend. The actions above will make a difference but not immediately. We will likely see the impact of the Fed's actions in the next 1-3 months.
- When uncertainty is present, crazy things start to happen. Until more is known about the virus and when it will be contained, markets hate uncertainty and rates will not move down.
What is next?
- Be patient. We are telling our clients to be patient and eventually we will see mortgage interest rates come down.
- Be careful. You will begin to see advertisements that are misleading indicating mortgage rates have dropped. Likely this will come from those trying to pull you in only to discover the real story when it is too late. If you see or hear something about rates, reach out to me directly via email and I can confirm for you.
- Be prepared. If you want me to see if refinancing will eventually make sense for you, email me a copy of your last mortgage statement. We can get all our ducks in a row, have you loan underwritten and ready so that when rates do go down, we can move quickly and lock it in. Remember the comment above about capacity? Be ready so you can beat the massive influx of loans coming in at that time.
We have never been here before. We are in unchartered territory. Will the economy recover? It will. When? Depends on the virus. Experts at the Cleveland Clinic are saying a peak will occur end of April others are saying December. We just don't know but some sort of normalcy could be happening in May and mortgage interest rates will move lower.
Guest blog post courtesy of Michael Delzer
President,First Class Financial Services | NMLS 265701 | 720.904.9048 |mike@fcfsdenver.com
5280 FIVE STAR Mortgage Professional 2010-2019
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