T'was the Night before the Federal Reserve Meeting and all through the Mortgage Industry...
Eric Simantel
Making Mortgages Less Expensive. Licensed in OR, WA, and CA and now Idaho.
We are at the Eve of the May 2022 Federal Reserve Board having a 2-day long meeting.?This has been formally on the calendar for quite some time.?Folks have been asking me over the last week or so, what I think the Federal Reserve will do regarding the Prime Interest Rate.? My response is that it isn’t what I think the Federal Reserve will do, it’s what the market thinks the Federal Reserve will do.
Most large banks and lending institutions that I’ve researched seem to have targeted an expectation that the Federal Reserve to raise the Prime Rate by 0.5% (moving it from 3.5% to 4.0%).
Q: Does this mean if the Federal Reserve raises the Prime Rate by 0.5% that mortgage rates will go up by 0.5%?
A: That is a loaded question.?The answer is “Yes” and “No”.????
The answer is ‘Yes’ to any open and established liability that has a payment schedule and interest rate tied DIRECTLY to the Prime Rate (for example, if your open and live home equity line of credit has its interest rate tied to the flucuation of the prime rate, you bet your bottom dollar the interest rate you are paying is going up by the exact amount the prime rate goes up by).
The answer is ‘No’ (most likely) to current available, unlocked mortgage rates.?The last time the Federal Reserve raised the Prime Rate by 0.5% was May 17, 2000.?The average mortgage rate on a 30-year fixed in America raised after the announcement from 8.52% to 8.64% (+.12%).?You see, regular ‘ole 30 year fixed Mortgage Rates are not TIED directly to the Prime Rate.?They are however influenced by market conditions.?The Mortgage backed securities market (in my opinion) seems to have already built in the expected news of a 0.5% prime rate increase into its pricing.?Just as it has already incorporated the expected news of a recession coming, the war in Ukraine, etc.?It’s when something unexpected happens that you’ll see a sudden fluctuation for the good or bad in the mortgage backed securities market.?The bigger the unexpected event, the bigger the fluctuations.?Just as any mortgage broker about the month of April in 2020 when Covid first hit could tell you… Market swings were happening almost hourly and at unprecedented frequency because of the big news of a pandemic, and the big news of the unclarity of what would happen to the economy and county. New headlines were coming out daily.
What I am interested in seeing, is if the Federal Reserves comes out of their meeting with a conservative approach and only raises the prime rate by 0.25%, if they decided to hold off all together (which is unlikely) on raising the Prime Rate. Or what happens if the reverse is true and they decide to be hyper-aggressive and raise it by 0.75% ( that hasn’t happened since November 15th, 1994 – and guess what mortgage rates that week on a 30-year fixed went from 9.19% to (wait for it…) 9.19%... no change at all!?The reason is because it was an expected rate increase by the Feds... in this case, a 0.75% increase would be unexpected.
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Key Takeaway.?If the announcement is a 0.5% prime rate increase – the markets are likely to stay as ‘business as usual’.?The bigger the variance from that expectation, the bigger the splash becomes in the pool.
POSTSCRIPT: May 4th, 2022 The time is 1:10PM - just about an hour after the Feds made the annoucement. They did indeed raise the prime rate by the expected 0.5%. The Mortgage Backed Securities market - is seeing virtually no price changes - which means no mid-day mortgage rate changes - which means as stated above, the rate change is already built into pricing. Forecast confirmed!
Same Disclaimer as my last published article:?Because I talked about interest rates in this article, its probably prudent of me to say that I am NOT a financial advisor.?Your investments and your investment strategies to your portfolio shouldn’t be based on what you read here.?Rather, talk things over with a licensed Financial Advisor.?My predictions are my own and based on individual research and don’t reflect that of C2 Financial Corporation.?If there are 36 super computers predicting the weather, just imagine how many there are used to predict economic conditions!?And still, they aren’t always right!
Eric Simantel is a licensed Mortgage Originator and Branch Manager at the Ryder Mortgage Group, located in Portland, OR.?He holds an MBA from the University of Oregon (2002).?
To keep track of when the Federal Reserve meets, feel free to bookmark their calendar with the link below!