Rasty Goodwin NMLS #218465

This blog is a little late seeing how the FED is meeting next week to review our fate again however, I continue to field an exhorbatant amount of phone calls of why mortgage rates have gone up when the Fed has lowered the rates and if they haven't actually gone down why does it say so on the internet adds?

First off the internet adds are designed for the masses and to appeal to those who will not research to find out truly what has happened in the market. They read a cute add with an animated dancing person about Fed dropping the rates thus our rates have miraculously dropped as well! Yeah, that'll happen. As mentioned the adds are designed to get those who are less informed to call so they can give you a sales pitch and get you to refinance, much like the adds as recently as a few months ago that were still advertising $300K mortgages for $800 a month. There is a reason they sound to good to be true, they are and you are stuck paying fees to someone you'll never meet who is most likely nothing more than a teller trained to get you to refinance and tell you how great it's going to make your life. For informational purposes see all the people in Cali, Florida, Arizona and Nevade (to name a few) banking on substantial speculative appreciate in home values and bought homes on the low payment loans (Pay Option Arms) and are now stuck on reverse mortgages with receding property values.

Second off the change of the Federal Funds rate has several effects that are not solely tied to mortgage rates but rather mortgage rates adjust based upon the expectations of the investors to the change in the Federal Funds Rate. One side note, see a blog by Tom Elder in Active Rain, 1/28/08, this has a good explanation and I'm not going to repeat that portion but rather refer you to his site to review that material. Mortgage loans are basically lumped into large funds of mortgage back securities and are what we call fixed income assets. For instance if you were to purchase these assets you would buy them and expect to receive x% for purchasing that security each month. (If you take out a $500K mortgage loan at 6.5% you're paying a 6.5% interest rate to borrow the money, the servicer of your note usually receives about .25% to service the note and the owner of the note would receive the remaining 6.25% as income for the life of the loan.) This is a fixed income asset, the income isn't going to change. However, if the Fed lowers the Federal Funds Rate (again see Tom Elder) numerous wheels are set in motion the first of which is the increase of inflation fears. As those fears increase mortgage interest rate have to rise to compensate for the amount of anticipated inflation. If you want to receive an income from your fixed income asset of say 6% and expected inflation is 3% then you wouldn't purchase a fixed income asset less than a 9% return because once you compensate for the expected rate of inflation of 3% your net return would be the 6%. It's not exaclty this simple but it's close.

This is also the reason why you see mortgage rates drop when a catastrophic event happens somewhere in the world. This is the flight to quality concern. When a significant event happens (terrorist activity) you see investors leave the speculative market of buying stocks and move to the safe haven of bonds. The purchasing of these bonds drives the prices of the bonds up pushing the rates down.

Now again, I wish it were that easy to explain and that is just a very brief overview and I would encourage you to read Tom Elders blog as well. However, the facts are that the rates change on a daily, (sometimes hourly) basis, just as the stock market does and it could hinge on any number of things. These are just a few of the larger impact reasons rates change and in what direction. I highly advise you to choose an advisor not a mortgage website with Fred your freindly neighborhood ARM consultant. If they had your interest in mind they wouldn't be working for minimum wage in a call center.