When the Fed cuts rates to near zero, mortgage rates don't automatically follow because they're tied to long-term bonds instead. Notary signing agents should expect fewer loan signings during economic downturns, even as the Fed tries to stimulate borrowing.
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If the Fed rate is nearly zero, how come mortgage rates aren't nearly zero? And I'm guessing you are also wondering how does the Fed rate drop affect loan signings? Well, let's get started. The first thing to understand is that there are essentially two interest rates that have a major impact on our economy. Those are short term interest rates and long term interest rates. Generally speaking, short term interest rates affect any type of loans that are 10 years or shorter, like auto loans or personal bank loans. And then there are long term interest rates that affect any loan that is 10 years or more, like mortgages. So understanding those basic facts, it should make understanding why the federal funds rate, or commonly known as the Fed rate, does not directly control mortgage rates. The Fed rate is the benchmark for short interest rates which are for short term loans, not interest rates for long term fixed rate loans, which the majority of home mortgages are. And that is the answer to why mortgage rates are not nearly zero. Now the Fed rate does directly affect adjustable rate mortgages and home equity lines or credits as those are short term loans. But what about 30 year fixed rate mortgages? Does the Fed rate drop affect longer term mortgage rates? The answer is yes and no. The most basic reason being that when the Fed lowers the short term interest rate, it signals the economy is becoming weaker and it would be disastrous for long term interest rates to stay high in a down economy. So while the Fed does not directly mirror long term mortgage rates, when the government drops the Fed rate, mortgage rates trend downward in the following months. To put it simply, in a bad economy, interest rates go down, lower interest rates equal more home refinancings and more home refinancings mean more loan signing appointments. Lowering short term and long term interest rates is the government's primary way to ensure the economy continues and strengthens through any downturn or recession. The lending industry is one of the unique industries that the government prioritizes and is the first to be strengthened as the economy economy goes down. Why? Well, because the cheaper money is to borrow short term or long term, the more people spend. That's driving the economy upward. The lower mortgage interest rates are, the more people will refinance their homes, lowering their monthly payments and giving them extra cash to spend in the economy. The last time the Federal Reserve took this similar approach was getting us out of the Great Recession in 2008. The following year, home loan originations rose nearly 30% or over 2 million more home loans were funded. It could get really busy for loan signing agents across America to learn how to be part of an industry that thrives in a down economy. Click the link below.
