The Federal Reserve did it — raised the target federal funds rate a quarter point, its first boost in nearly a decade. That does not, however, mean that the average rate on the 30-year fixed mortgage will be a quarter point higher when we all wake up on Thursday. That’s not how mortgage rates work.
Mortgage rates follow the yields on mortgage-backed securities. These bonds track the yield on the U.S. 10-year Treasury. The bond market is still sorting itself out right now, and yields could end up higher or lower by the end of the week.
The bigger deal for mortgage rates is not the Fed’s headline move, but five paragraphs lower in its statement:
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.”
When U.S. financial markets crashed in 2008, the Federal Reserve began buying billions of dollars worth of agency mortgage-backed securities (loans backed by Fannie Mae, Freddie Mac and Ginnie Mae). As part of the so-called “taper” in 2013, it gradually stopped using new money to buy MBS but continued to reinvest money it made from the bonds it had into more, newer bonds.
“In other words, all the income they receive from all that MBS they bought is going right back into buying more MBS,” wrote Matthew Graham, chief operating officer of Mortgage News Daily. “Over the past few cycles, that’s been $24-$26 billion a month — a staggering amount that accounts for nearly every newly originated MBS.”
At some point, the Fed will have to stop that and let the private market back into mortgage land, but so far that hasn’t happened. Mortgage finance reform is basically on the back-burner until we get a new president and a new Congress. As long as the Fed is the mortgage market’s sugar daddy, rates won’t move much higher.
“Also important is the continued popularity of US Treasury investments around the world, which puts downward pressure on Treasury rates, specifically the 10-year bond rate, which is the benchmark for MBS/mortgage pricing,” said Guy Cecala, CEO of Inside Mortgage Finance. “Both are much more significant than any small hike in the Fed rate.”
Still, consumers are likely going to be freaked out, especially young consumers, if mortgage rates inch up even slightly. That is because apparently they don’t understand just how low rates are. Sixty-seven percent of prospective home buyers surveyed by Berkshire Hathaway HomeServices, a network of real estate brokerages, categorized the level of today’s mortgage rates as “average” or “high.”
The current rate of 4 percent on the 30-year fixed is less than 1 percentage point higher than its record low. Fun fact, in the early 1980s, the rate was around 18 percent.