Why do mortgage rates go up when the Fed lowers rates?

The Fed cut rates 50bp on Wednesday which takes the Fed Funds Rate down to 3.0%. This is a big help for business loans, consumer loans, Home Equity Lines of Credit and Adjustable Rate Mortgages. But how will this affect mortgage rates? As we have said for years, Fed Rate cuts do not have a direct impact on fixed mortgage rates. In fact, they often serve to push them in the opposite direction, by fanning fears of inflation when they cut - or by fighting inflation when they hike. Fixed mortgage rates are directly affected by inflation, because a fixed rate mortgage provides the investor with a fixed rate of return for a long period of time. As inflation increases, the buying power of that fixed return is eroded, because it costs more dollars to buy the same amount of goods and services. So if inflation is on the rise - investors will demand a higher fixed rate of return to compensate them for the more rapid erosion of buying power on their return. The last time the Fed had a long cutting cycle was back in 2001. The Fed cut eleven times in eleven months, and eight of those cuts were by 50bp, for a total of a 4.75% drop in the Fed Funds Rate. But mortgage rates were actually higher throughout this drastic cutting cycle, because inflation ticked higher. Let's look at more recent history, and as we have pointed to previously: the Fed cut by 50bp on September 18, 2007, and after prices enjoyed a move higher that afternoon, Mortgage Bonds lost 94bp over the next two days. On October 31st, the Fed lowered by 25bp...and over the next five trading days, Mortgage Bonds lost 78bp. On December 11th, the Fed lowered by another 25bp, and over the next two days, Mortgage Bonds lost 64bp. Most recently - the surprise 75bp cut by the Fed cost us about 150bp on our rate sheets over the next two days.

Reprinted from an original posting by Michael Lee of Trident Mortgage Bankers (owned by Pudential Fox and Roach Realtors)

New Loan Program Eliminates PMI!!

This is great news!! For the uniformed, PMI (private mortgage insurance) is insurance YOU would have to pay as a home buyer for the benefit of the lender/mortgage company in the event you are putting less than 20% down. The fees for this can be pretty hefty.

Now, some lenders are actually offering borrowers with good credit the opportunity to borrow up to 85% of the sale price (15% down), with NO PMI and the exact same interest rate they would get with 20% down. For these same high credit score borrowers (generally this means over 700) they can put even 5 or 10 % down and not pay ANY PMI, but at these lower down payments they can expect a small rate bump - on the order of 1/4 point.

Buyers with less than stellar credit are also eligible for slightly higher rate bumps, but NO PMI means the savings are still huge! This is a great deal!

I see the Real Estate Market Picking Up NOW!

The third week in January, it is bitter cold here in Philly, yesterday was the NFL playoffs - to many folks - way more exciting than the Super Bowl. Combine that with all the doom and gloom you hear about how much the real estate market is in the toilet. Everyone from the WSJ to Suze Orman has led us to believe that no one is buying homes and Realtors might as well just give it up - go become hairdressers, or whatever.... Are they right?

Um, imho - they are all wrong. Our office had amazing open houses yeseterday with LOTS of buyers showing up at properties that did not even have any directional signs on them. Buyers came just from ads, e.g. no curious and nosy neighbors!! Our phones are busy. Properties are getting offers - some multiple bids taking place. Mortgage rates are fab right now - only 5.75 %. This is exciting. I think the media is always six-nine months behind in reporting what I observe day to day. It took them a really long time to realize that the market was tanking - I saw it about nine months before it was widely reported. Now, I see real signs of life in the market and the media is way behind again.

Smart buyers will jump in now while inventory is still up and rates are great - I say you have about a sixty day window of opportunity here. Rates may climb a bit in the spring. Just my intuition and gut feeling based on some empirical observations - combined with 24 years of watching the real estate market here in the Philadelphia area. What's your take?

Private Mortgage Insurance Deduction is Back!!

Congress Makes Mortgage Insurance payments tax deductible for 2007.


At a time when some homeowners need relief most, Congress has extended legislation allowing homeowners to deduct private mortgage insurance payments. When obtaining a home mortgage, borrowers who put less than 20% down are required by the lenders to take out this type of insurance. This insurance is for the benefit of the lender, not the homeowner and is paid monthly until there is 20 % equity in the property at which time the premiums may be dropped. That can, however, take quite a long time, especially when values are not appreciating or even falling.

The tax legislation, originally approved in December2006, pertained only to lands closed in the 2007 calendar year. With this renewal,there are three important points to note:

The tax deductibility extension is for three more years (through 2010). After that, it will have to be renewed again for existing homeowners to continue to deduct premiums and for new borrowers to take the deduction.

There are specific guidelines concerning annual income in order to determine who is eligible and at what level for this tax break. Consult your tax professional for more details. I also have additional details on the specifics of this legislation that I can provide to you. Please contact me if you want more information.