Mortgage rates rise dramatically following Fed rate
cut
By Holden
Lewis • Bankrate.com
Rates on 15- and 30-year mortgages shot up immediately
after Wednesday's Fed rate cut.
Most lenders raised long-term mortgage rates by one-eighth
of a point Wednesday afternoon, immediately after the Federal Reserve
cut a key short-term interest rate by one-quarter of a point. Some
mortgage lenders tacked on another eighth of a point Thursday morning,
for a total of a quarter-point rate increase in less than 24 hours.
That's not what most borrowers expect after a Fed
rate cut.
The Fed controls short-term rates, and those don't
always move in the same direction as long-term rates, points out
Janis Smith, spokeswoman for Fannie Mae, the biggest buyer of mortgages
on the secondary market.
She says that many investors expected the Fed to cut
short-term rates by half a percentage point. When the Fed cut only
a quarter-point, investors revised their rate expectations upward
for everything from the shortest-term overnight bank loans to 30-year
mortgages.
More specifically, bond investors adjusted their expectations
upward. The yield on the 10-year Treasury note spiked upward in
the minutes after the less-than-expected Fed rate cut. Long-term
mortgage rates tend to move in the same direction as 10-year Treasury
yields, so they went up, too. That was a reversal for rates, which
had dropped earlier on Wednesday, as recorded by Bankrate.com's
weekly
mortgage survey.
"What we've seen in the last week is somewhat
more positive economic news, combined with a less-deep-than-expected
Fed rate cut," Smith says. Those combined to drive mortgage
rates upward.
The mortgage market was responding not only to the
Fed's rate cut, but to what the Fed said in its explanation for
the rate cut. The Fed expressed more optimism about the economy's
long-term prospects than investors and business executives had expected.
Long-term optimism leads to higher long-term interest rates.
The Fed said: "Recent signs point to a firming
in spending, markedly improved financial conditions, and labor and
product markets that are stabilizing."
It went on to say that the economy isn't growing yet,
but it will, with help from the Fed's most recent rate cut.
David Weiser of Mortgage Master, a mortgage lender
based in Walpole, Mass., says rates on 30-year fixed-rate mortgages
rose about one-eighth of a percentage point (0.125 percent) Thursday
morning. A loan officer at an Atlanta-based bank says his rates
rose by an eighth of a point Wednesday afternoon and another eighth
of a point Thursday morning.
Rates rose "because experts were disappointed,"
Weiser says. Rates had dropped over the last month "in expectation
of as much as a half-point drop (in short-term rates) that didn't
happen."
Weiser holds out hope that mortgage rates will settle
back down in the coming weeks as bond investors realize that the
economy continues to struggle, despite what the Fed says.
"It's all gloom and doom out there,"
Weiser says. "I don't care what (the Fed's) Beige Book numbers
say, people are losing their jobs. And people who aren't losing
their jobs worry that they will."
Lawrence Yun, an economist for the National Association
of Realtors, points out that one group of mortgage borrowers could
benefit: those who are getting adjustable-rate mortgages, or ARMs.
Depending on when and how their rates readjust, some could see their
rates go down because of the Fed rate cut.
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