First and foremost, it is important to note that the Federal Reserve does not control mortgage rates. They have the ability to control important ‘indexes’ such as the “ Discount Rate” and “Fed Funds Rate”, which ultimately influence mortgage rates, but there is no direct coleration between the two. Typically, the only mortgage related mechanism that is directly affected by a Fed rate decrease or increase, is the “Prime Rate”. The Prime Rate is typically the rate that banks use when lending to their standard borrowers for auto loans, student loans, home equity loans, and the like.
From a strictly data perspective, The Fed Funds rate was at 5.25% a year ago (July 2007). Since then, there have been six (6) fed rate cuts, bringing it to the 2.00% mark where it is as of July 2008. In comparison, the published Freddie Mac weekly average mortgage rate is now 6.45%, versus 6.67% from a year prior, so in theory, rates have decreased. The very slight rate decrease shows the disproportion of comparing the two indexes to one another, and truly supports the theory that these do not work in synch with one another.
Furthermore, with the development and growth of mortgages in the past few decades, a completely new style of mortgage lending emerged. Most mortgages are ultimately sold or traded in what is called a “secondary market”. Mortgages are amassed and bundled into pools that are finally securitized into bonds that are purchased by financial institutions, Wall Street companies, and retirement plans. This environment is called the Residential Mortgage Backed Securities market. (“MBS”). Mortgage rates are usually generated and priced by following the appetite for these MBS bonds in the market.
In my opinion there is also another reason for the disconnect and for the high rates that we see today. Simply put, banks are less anxious to lend. For that reason alone, rates will increase. Furthermore, Fannie Mae and Freddie Mac, who are the largest “buyers” of these mortgages in the secondary market have imposed increased fees and charges for many of the mortgages they will now buy. There are increased fees ranging from credit score, to Loan-to-Value, and many other detailed itemizations that penalize non-pristine loans.
It is the objective of a good mortgage lender to factor everything into consideration and determine the best overall means to structure a loan to maximize the best rates for their borrower. For example, by removing a co-borrower who has a poor credit score, and is just “tagging along” because he/she is the spouse, can in effect cause a .25% difference in interest rates. Good deals and rates are still out there, it all depends where you look!