Recent events have generated a lot of questions, so we’d like to help answer some of the more frequently asked:

The Fed lowered its rate, can I get a 0.25% mortgage?
No. The Fed lowered the Funds Rate. The Fed Funds Rate is the overnight rate that banks can lend to each other. When this rate is cut, it will have an impact on shorter term rates like the 2-year, etc., but it will not have a direct affect on longer term Bonds, like 30-year Mortgages. Of course, it can have an indirect effect, but sometimes when the Fed cuts rates, 30-year rates can go higher if it’s viewed as inflationary. Remember, Bonds hate inflation because it erodes the value of the fixed return you get from a Bond…and longer term Bonds react more adversely because they mature in a longer period of time.

If mortgage rates aren’t based on the Fed Funds Rate, what are they based on?
They’re based on mortgage-backed securities (MBS). A mortgage-backed security is a type of asset-backed security which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals that securitizes, or packages, the loans together into a security that investors can buy.

What did the Fed do that might help with interest rates?
The Fed has increased Quantitative Easing (QE). This means the Fed is buying at least $700B in MBS and Treasuries. Additionally, the Fed is not allowing their current holdings of MBS and Treasuries to roll off their balance sheet anymore. The Fed amassed a huge balance sheet of MBS and Treasuries after their QE efforts to stimulate the economy after 2008…Remember QE1, QE2, Operation Twist, QE3? They did this to keep rates low and to spur lending so companies could expand, create more jobs, and fuel the economy. For quite some time the Fed was keeping their balance sheet net neutral. This means that they kept their level of holdings of MBS and Treasuries the same, even though they would, over time, roll off their balance sheet. When a Treasury matures, or people refinance or pay off their mortgage or make principal payments, the Fed gets that money. What they were doing before last September was buying more MBS and Treasuries to keep the balance sheet net neutral or the same. But as of last September, the Fed was allowing the MBS and Treasuries that would naturally fall off to do so. After last night, they are not going to allow them to roll off anymore. This means they will be buying more than the $700 Billion they said and will eat up a lot of the supply of Bonds and Treasuries out there. This reduction in the supply should provide support and possibly cause rates to move lower in the next few weeks as lenders get their footing back.