In an emergency response to the recent outbreak of the COVID-19 virus in the United States, the Federal Reserve slashed interest rates for the second time, but this time to an unprecedented rate landing between 0% and 0.25%. So how do these massive interest rate cuts impact real estate, specifically mortgage lending?
To help get to the bottom of this, we solicited the expertise of one of Flagstar Bank's Senior Loan Advisors, Ron Wieczorek. Ron has been in the mortgage industry for nearly two decades working through and experiencing disasters like 911, the 2008 housing market crash, and now the COVID-19 pandemic and has come to understand the ramifications these types of events have on the our economy, specifically relating to interest rates and loan practices.
So, what actually happened here?
The week prior to the Federal Reserve cutting interest rates to near zero experts were seeing some worrying signs. Ron explains that usually when the stock market declines, mortgage rates decline as well. In this case however, mortgage rates stopped going down and instead there was an increase in rates. This increase was due to a couple of issues. The first was an industry-wide problem with capacity. Basically, the system was clogged up with people trying to take advantage of the already existing low interest rates for activities like refinancing. The second issue was one relating to liquidity. Investor reacted to this issue by ticking rates up manually in case the low interest rates were just a flash in the pan. These types of issues are normally seen when the system is at extremely high capacity. Ultimately, the rapid escalation of the COVID-19 pandemic across the U.S. triggered the Federal Reserve to further drop interest rates to between 0% and 0.25%.
What does this mean for mortgage loans?
What is important to understand here is that mortgage loan rates were not directly impacted by this cut. The Federal Reserve specifically cut the Federal fund rate, not the mortgage loan rate. These two rates are not directly linked. To understand what the Federal fund rate is, basically this is the premium banks charge consumers when the bank needs to fund a loan overnight. When a bank is trying to finance a loan for someone or something this quickly and the bank doesn't have enough money in their own reserves to do so, they leverage the fiscal reserves of other banks to fulfill that loan. Simply put, this is a loan from one bank to another bank. The interest charged on these bank to bank loans are the rates that were slashed to nearly zero by the Federal Reserve.
Is it still a good time to buy a home then?
The short answer is yes.
While only bank to bank loans saw a direct cut in rates and consumer-type loans, like mortgage loans, were not directly impacted, the Federal fund rate cuts do positively impact mortgage rates indirectly. Even though mortgage rates are nowhere near zero like the Federal fund rates, there were other things built into the Federal fund rate cut that will help with overall quantitative easing, including the purchase of mortgage backed securities.
Ron wants to emphasize that, mortgage rates are still extremely low making it a really great time to buy a home. With interest rates this low for mortgage loans, consumers who six months ago couldn't afford to buy a home when interest rates were higher now have the ability to buy and that's a huge opportunity for many of the want-to-be homeowners out there.
Interested in learning more? Tune in to the short 10 minute webinar replay below.
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