Mortgage Rates Versus The Fed’s Rates Versus Buying Now

OK, The Fed has lowered its rates. Why haven’t mortgage interest rates plummeted?

It’s a long-term vs. short-term interest rate story (an ongoing saga, some might say):

The Federal Reserve controls SHORT-TERM interest rates, but not LONG-TERM one’s.
The Fed’s interest rate is what it charges BANKS (not consumers) when they “purchase” U.S. Treasury securities (generate funds for the bank to invest in things such as mortgages) of one to six-months in length. Lower the rate and banks borrow more, but they don’t necessarily have to lower the rates they charge YOU on a mortgage.

More important: Mortgages run for 15 or 30 years, or so, not one to six months. These longer-term products, and their interest rates, MAY eventually go down following a Fed interest-rate drop. Generally, bankers (you can, too) watch the 10-year U.S. Treasury BOND RATE, to determine their mortgage rates.

But there’s one more piece: Banks and mortgage companies, your loan originators, immediately sell their mortgages to Fannie Mar or Freddie Mac.

Fannie and Freddie, PRIVATE not GOVERNMENT agencies, obtain their money by selling BONDS to worldwide investors, using the PROCEEDS to buy mortgages. The interest they charge must cover their costs. Your mortgage interest, and the principal you pay each month, must exceed the principal and interest they charge their bond holders.

These bond holders base the interest they will accept on the bonds they purchase from Freddie and Fannie upon the ANTICIPATED RATE OF INFLATION. For example, if inflation is running at 2%, bank/mortgage broker rates will be roughly 7% and everyone is happy.
In effect, it’s a circle: Fed > controls short term rates, hoping to “control” the rate of inflation (and trigger consumer spending) > Banks purchase U.S. Treasuries for money to loan out as mortgages > everyone watches the rate of inflation and the 10-year U.S. Treasury Bond Rate, which helps to determine mortgage interest rates.

However, all of this is MUTE in Stamford and environs because our interest rates are ALREADY very low, historically low and who knows how or when, if ever, these rates will sink even lower, certainly not for several months…if ever!