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The Mortgage Report Why Mortgage Rates Are Moving Up In Spite of Fed Cuts When the Federal Open Market Committee (affectionately known as "The Fed") cuts the rate banks charge each other on overnight loans, I usually get a lot of calls from clients wondering if mortgage rates fell as much as the Fed cut, or more. Reading the announcement that the Fed makes with the cuts, which is written in esoteric Fedspeak doesn't help, but logic seems to dictate that if Uncle Fed cuts the rates, all rates should go down proportionately. In economically peaceful times, this sometimes actually happens, but in such times large rate cuts usually aren't necessary, and as anyone who has to drive a car or eat can tell you, we aren't currently experiencing economic tranquility. Since the first of the year, the Fed has cut the discount rate from 4.5% to 2.25%, yet 30 year fixed rates are actually higher now than they were in January. The reason? Supply and demand. Because of uncertainty bordering on panic in the credit markets, demand for mortgage backed securities has plummeted since the real estate market correction and sub-prime meltdown. Weak investor demand drives rates up just as strong demand pushes them down. Making matters worse, concerns over the credit worthiness of borrowers by banks who are holding a large portfolio of bad loans has caused them to tighten underwriting guidelines, meaning fewer borrowers qualify for loans to begin with. The good news is rates are still relatively low, with the 30 year fixed rate within ½% of the low for the last forty years. Opinions on where long term rates are headed abound, but to end with a little economic jargon I learned in school: "Upside potential for lower rates is limited. Downside risk for higher rates is significant". I wonder if the Fed needs a speechwriter?
Carl Trawick is a Mortgage Specialist and Licensed Mortgage Broker with the firm Access e*Mortgage. He can be reached at 904-343-1145 or ctrawick@nefcom.net
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