With headlines like the one below, it is important to clarify how recent news is impacting mortgage interest rates and the mortgage industry. 

“Fed slashes interest rates close to zero, boosts assets by $700B to fight coronavirus pandemic.”

Sunday evening The Federal Reserve slashed the benchmark federal fund rate by a full percentage point to near zero. It also said it would buy $700 billion in Treasury securities to insulate the U.S. economy.

While this cut is directly related to rates on credit cards and Home Equity Lines of Credit, the connection to mortgage rates requires a bit more explanation.

In short, this does not mean that 15- and 30-year mortgage interest rates went to near zero. Last week alone, we saw roller-coaster market swings that changed mortgage rates by up to .75%.

This move will put downward pressure on mortgage rates, but how quickly the market and the industry will be able to respond remains to be seen. The mortgage industry was already dealing with more refinance demand than it could handle, causing actions to be taken to slow the intake of applications.

Central Banks cut rates for one reason ... to stimulate the demand in the economy.  The coronavirus crisis has us simultaneously trying to strategically shut down the economy through isolation or shutting events and businesses down.  That constrains supply.  You never want to stimulate demand while at the same time trying to impose actions that limit social interaction.  Economies require social integration to really thrive.  

Businesses that require people or labor as a component of the product they provide, their productive capacity will be reduced as a result of the virus.  That is true for the mortgage business.  Sickness, working from home, and all of the disruptions that are a result of the virus are reducing the number of mortgages the industry can produce.   When the Federal Reserve slashes interest rates and drives down mortgage rates, the number of people that want mortgages goes up dramatically. At the same time, the industry’s supply of mortgage loans is limited.  In short, it takes people to originate and close mortgages.  Any business that uses people is now constrained.  With the Federal Reserve’s move to lower rates, we have far more people that want mortgages than we have people to produce them.  

Two things make rates and prices go up.  When supply goes down, prices go up.  When demand goes up, prices go up.  We have both of those price discovery forces at the exact same time.  

Mortgage rates will likely go down, but there is a great deal of pressure pushing them higher as well. It will take some time for the Federal move to be fully realized by the mortgage industry. Because of this, it is important to look at your individual mortgage, rate, and loan term situation with a professional who can help you decide when and if to refinance. This includes those of you who have recently refinanced or are in the process of refinancing. Depending on what happens from here, those of you may be in the best situation of everyone, given the volatility in the market. 

We are watching all of these things closely, and we want to help you improve your financial situation and monthly mortgage expense. Call a Ruoff Loan Officer today so that we can educate you on your best move.