Future FED Action. Will it be good or bad for us?

I don't know how many times during the week we field calls from people checking on mortgage rates. Obviously this is the business we are in, but lately the callers are asking a few more questions. This is a good sign in that these consumers are following the market and our economy more closely than in the past. The more educated consumers that are out there the better! Now back to the questions. These typically circle around the topic of today's rates and how future changes in the economy will affect them. They are mostly referring to the FED and the cuts or hikes they make from time to time. "Why did rates go up when the FED cut rates?" is a very common question we hear. It is a very good question and one we have addressed in our blog several times. The FED is not adjusting mortgage rates. They are making changes to the Federal Funds Rate or the discount rate. These are rates that affect what banks can borrow money at and more closely affects short term items like car and home equity loans. Mortgages are long term products and Mortgage rates are tied to how Mortgage Backed Securities (MBS's) perform. MBS's are bonds which are fixed assets, therefore inflation plays a key role on how bond traders value them. If inflation is deemed to be a problem in the future then MBS's are a bad investment and they pull their money out. By doing this, mortgage rates go up! Make sense?
This is a concept that has been very hard to grasp from some people and it is frustrating because it is expensive to track how MBS's are performing on a daily basis. People feel like they don't have much control when they are shopping around and want to monitor rates. This is even more of a reason to use a solid mortgage professional who monitors these indicators daily! Your mortgage is a lot of money and locking at the appropriate time is very important.

We have now come to a point where inflation is becoming more and more of a problem. Just today inflation surged 5.6%. With this being the case, the FED is no longer discussing rate cuts. They are talking about keeping the rate where it is or increasing it. A rate hike definitely seems likely and is probably overdue. Now based on what we just discussed, what do you think could happen to mortgage rates with a rate hike? If a rate hike is done it will be to fight off the effects of inflation which is good news for MBS's! What happens when MBS's come more into favor? That's right, mortgage rates improve! Will we soon see rates that were as low as they were a few years ago, I highly doubt it. However, I think we can all agree that fighting inflation and lower interest rates will be a GREAT sign! I tried to keep this explanation in very simple terms since this topic can get very complicated. I know when I study up and do research on the topic I get dizzy! I hope this information was helpful to some. If you are a realtor that that doesn't currently get a copy of our weekly newsletter and would like to, please email eric.hemmer@pmg-inc.net or shawnvt@pmg-inc.net. We will gladly put you on this list. With this tool we try to keep everyone up to speed on what is going on locally and nationally.

Brought to you by:
Professional Mortgage Group, Inc.
"Your Columbia, MO Mortgage Broker"