No, The Fed Didn't Cut Mortgage Rates!

By: Matthew Graham •

Mortgage rates were mostly unchanged today, which will come as a surprise to scores of consumers who mistakenly believe the Fed's 0.25% rate cut equates to a 0.25% drop in rates.  The Fed does not set mortgage rates!

Actually, to be fair, the Fed Funds Rate (that thing everyone is talking about today) is in fact the basis for Home Equity Lines of Credit (HELOCs) in many cases, but that's it as far as the mortgage world is concerned.  The most common mortgages are determined by other parts of the financial market. 

In fact, mortgages actually "turn into" securities that are traded in financial markets as a part of the process that makes them safer and easier for investors to buy. Those securities trade just like other securities, for the most part (e.g. stocks, bonds, etc.), and it's the price movement of those securities that most directly dictates mortgage rates.  Shockingly enough, these are known as Mortgage-Backed Securities (MBS).

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Unlike the Fed Funds Rate, which only changes once every 6 weeks, if at all, MBS can change every minute of every business day.  They've been doing just that for months as market anticipation for the Fed rate cut has increased.  Simply put, the Fed rate cut has long since had its impact on the financial market and today merely saw a very small epilogue to that bigger story. 

If you want to think about this in terms of the stock market, just consider that stocks LOST ground today.  Why would they do that if a Fed rate cut is universally considered to be positive for stocks?  Here again, stocks have already had plenty of time to PRICE-IN the rate cut.  That left today for them to react to other information from the Fed.  Specifically, they were a bit disappointed that Powell didn't do more to offer assurances about additional cuts.

The bottom line is that when financial instruments (like stocks, bonds, and MBS) can move all day every day, it would be foolish of them NOT to move in anticipation of something that will almost certainly happen.  That was the case with today's Fed rate cut.  In fact, they have already accounted for at least one more cut. 

That means, all other things being equal, if the Fed were to say "we're done cutting for now and will keep rates at these levels for the next 6 months," you'd see an immediate and rather large move higher in rates.  In other words, we're already counting on another 1-2 Fed rate cuts simply to sustain the low rates that are already here.  If those cuts don't come, rates will move back up. 


Loan Originator Perspective

As usual, Fed Day brought volatility, as bonds initially rallied on the Fed Statement, then regressed rapidly during Chairman Powell's press conference,  as he made it clear that future Fed Rate cuts were not a given.  Given heavy data (including inflation and July jobs report) the rest of the week, we could tip towards higher rates.  I am locking loans closing within 45 days. -Ted Rood, Senior Originator

In full float mode today.   Bond market is acting very nice today following the FOMC rate decision.   At this point, we need to allow some time to pass to give lenders the opportunity to pass along the improvements.  -Victor Burek


Today's Most Prevalent Rates

  • 30YR FIXED - 3.875%
  • FHA/VA - 3.625%
  • 15 YEAR FIXED - 3.5-3.625% 
  • 5 YEAR ARMS -  3.375-3.75% depending on the lender


Ongoing Lock/Float Considerations 

  • Early 2019 saw a rapid reevaluation of big-picture trends in rates and in markets in general

  • The Federal Reserve has been a key player, and while they aren't the ones pulling the global economic strings, their response (and even their EXPECTED response) to the economy has helped rates fall more quickly than they otherwise might.

  • Based on the Fed's laundry list of concerns, the bond market (which determines rates) will be watching economic data closely, both at home and abroad, as well as trade-related concerns. The stronger the data and trade relations, the more rates could rise, while weaker data and trade wars will lead to new long-term lows.  
  • Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders.  The rates generally assume little-to-no origination or discount except as noted when applicable.  Rates appearing on this page are "effective rates" that take day-to-day changes in upfront costs into consideration.