Anyone who had asked about mortgage interest rates’ relationship to the Fed rate would usually be told that the Federal Reserve rate had nothing to do with current mortgage rates. While that is technically true, the unprecedented moves by the Fed in the last few months have tied mortgage rates more inextricably to it.
In fact, in these unprecedented times, our current low rates are now directly thanks to the Federal Reserve. Why is that?
What Happens to a Mortgage After It’s Made?
Lenders seldom lend their own money, especially when it comes to long-term propositions such as 30-year mortgages. They would rather their own money be tied up short-term loans with a much higher yield, such as credit card or consumer debt.
What lenders will typically do is place your mortgage in a bundle of other mortgages to create what’s called mortgage-backed securities. These MBSs, as they are called, are then sold to investors. Selling MBSs is what enables lenders to generate the cash they need to make new loans.
How it Usually Works
The law of supply and demand comes into play when it comes to mortgage interest rates. When demand for mortgage-backed securities is up, a lender’s interest rate goes down. When demand is low, mortgage rates go up. That is how rates are typically determined in the industry. In normal times, investor sentiment about the economy drives the rates. Enter the Federal Reserve.
Now with our current instability, the Federal Reserve has agreed to buy unlimited amounts of mortgage-backed securities to shore up the economy. With the Fed coming in and buying a limitless number of MBSs, investor sentiment has soared. This created new demand and, consequently, the lower rates that we are seeing right now.
New Applications Created an Overload at First
Sometimes, higher rates have nothing to do with mortgage-backed securities. At first, when the Fed interceded, people wanted to take advantage of the interest rates that were, at that time, historically low. They began applying for low-rate refinances in droves not knowing what the future held.
Lenders simply couldn’t keep up. What happened? They deterred many of their overload of borrowers by increasing the rates. It was a win-win for lenders but confusing for borrowers.
Will it Last?
The current interventions taken by the Federal Reserve are meant as a temporary response to our current instability. It simply can’t last and shouldn’t for the health of the economy. Consequently, these rates are unlikely to survive once COVID-19 recedes. For those who are considering taking advantage of today’s rates, it probably should happen sooner rather than later.
We Would be Glad to Help
For borrowers who are currently in a good financial position, right now is probably the best time to consider a mortgage or refinance in California at these rates. At Granite West Funding, we would be glad to look at your financial situation and advise you of what your options may be. Call us at (559) 540-2275.