It’s been a crazy couple of weeks for the mortgage industry. On Sunday, the Federal Reserve announced it will cut another half point from interest rates and, more importantly for mortgage rates, buy back $700 billion in US Treasuries and mortgage-backed securities.
There’s been a lot of misleading information from the media about how this Fed rate cut impacts mortgage rates. Here’s what you need to know about what the Fed’s announcement means for your home financing.
Interest Rate Cuts Have No Direct Impact on Mortgage Rates
The cut to the federal funds rate did not lower mortgage rates. On Wednesday of this week, mortgage bonds suffered one of the biggest one-day losses in history, causing lenders to hike up mortgage rates multiple times throughout the day.
Mortgage rates typically trend with the 10-year Treasury yield, but current capacity limitations and low liquidity levels have created a wide spread between mortgage rates and 10-year Treasury bonds. And 10-year yields themselves have been volatile: on March 9th we witnessed record low 10-year Treasury yields, only to have them jump up 86 basis points a week later.
For now, the rate cut is not moving bond markets (and, indirectly, mortgage rates) the way the Fed intended. Once the Fed begins its $700 billion asset buyback program, however, we may see rates stabilize or even drop.
The Fed Will Buy Back Assets, Including Mortgage Bonds
The Federal Reserve said it will be buying back $500 billion of US Treasuries and $200 billion of mortgage-backed securities to flood the markets with cash and hopefully lower the impact of coronavirus on the economy.
This asset buyback will free up lenders from the major capacity constraints they’ve been dealing with after the huge increase in loan volumes. With the expectation that the Fed will buy more mortgage bonds, the Fed hopes to increase demand and prices, thereby lowering rates. Because the Fed has less stringent investing tastes than regular investors, their buybacks could push rates even lower than we’ve seen in recent months. But the question remains if a $200 billion buyback is enough to lower rates for more than a few months.
The timing of the buyback is still uncertain, so we won’t know exactly when they will impact mortgage rates. For now, rates are still high because of the high volume and capacity constraints on lenders and lack of investor appetite.
The past two weeks, bond and equity markets have moved in unprecedented and unpredictable ways. Treasury yields have sunk while mortgage rates have jumped. Right now, we’re waiting for the dust to settle to see the full economic impact of the coronavirus to bond markets and mortgage rates.
If you are currently in the middle of a home purchase or refinance, be aware that certain parts of the loan process that require face to face contact, like home inspections, may be difficult to accomplish right now. If banks and government offices limit their hours and notary services, closing processes could be delayed.
What You Should Do
If you’re thinking about a new purchase or refinance, talk to a Solidify mortgage advisor about the best timing for your loan and situation. Also, if you’re finding yourself with some social distancing downtime, think about using it to organize your finances or answering these 5 questions about your future home purchase.