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FED CUTS PUSH MORTGAGE RATES HIGHER

The Federal Reserve has been on a rate cutting spree once more. Mortgage
applicants are calling me expecting lower rates. Many are puzzled as to why
mortgage rates have not moved lower during the recent Fed rate cuts. This is
difficult to explain to consumers who have watched a 2.25% reduction by the Fed
with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising.
The Fed can only control the Discount Rate and the Fed Funds Rate. This is very
different from mortgage rates. A mortgage rate can be in effect for 30-years while a
rate set by the Fed can change from one day to another.

It is often said history repeats itself. And if history is any teacher, we can learn from
what happened to mortgage rates the last time the Federal Reserve was in a rate-
cutting cycle.

The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from
January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed
Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of
475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from
6.00% down to 1.75%. Mortgage rates actually moved higher during this time of
significant rate cuts because inflation, the arch enemy of bonds, gradually rose.
September 2007 the Fed cut the rate by 50bp. Mortgage bonds briefly moved higher
that day, but lost 140bp in just two sessions. Then in October the Fed cut again by
25bp. The mortgage bonds responded by losing 78bp over five trading days. In
December the Fed once again lowered rates by 25bp and mortgage bonds lost 88bp
over three days. The Fed delivered a surprise 75bp cut in January and mortgage
bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected,
the Fed cut rates by 50bp. Within 13 days, mortgage bonds lost 269bp.
Fed cuts may help the economy but don’t always equal lower mortgage rates. So
remember, be smart ask questions!