Dallas Fort Worth Area Homes and Real Estate

Each week, Freddie Mac releases the results of their mortgage rate survey they conduct to sample mortgage rates offered by lenders and brokers around the country.  Although some interpret this survey as the "rate that Freddie Mac sets" for mortgages, it is not; rates are not set by Freddie Mac directly, but rather by individual lenders and brokers based on mortgage bond pricing. Other factors can also affect these rates, such as the borrower's credit score, down payment, the property type and the total origination charge (points) that the lender is charging in order to obtain a certain rate.

In other words, the rates published in this survey are AVERAGES; they are not the exact rate that every single borrower can expect to receive.  Some borrowers may be able to secure a lower rate if they are making a large down payment and have excellent credit, whereas borrowers with lower credit scores and who may be purchasing properties with higher risk factors may not be able to lock in rates this low.

The results of this survey are published by Freddie Mac every Thursday.  They show average rates for four types of loan terms: 30 year fixed rate, 15 year fixed rate, 5/1 adjustable rate and One year adjustable rate mortgages.

The average mortgage rates reported by Freddie Mac as of today (April 22, 2010) were:

30 Year Fixed Rate Mortgage - 5.07%

15 Year Fixed Rate Mortgage - 4.39%

5/1 ARM - 4.03%

One Year ARM - 4.22%

 

And here's a chart that shows the trend of these four rate categories since the first of the year:

 

While rates have climbed some since the 2010 low set back in February, they are still near historic lows.  The end of the Federal Reserve program to purchase mortgage-backed securities has not had as much impact on interest rates as some expected, but the market has not had much time to adjust to this new reality as of yet.

Do Mortgage Rates Drop After A Presidential Election?  Does the President even have much control over mortgage rates?

Everyone is buzzing about the prospect of lower mortgage rates after the Presidential election.   Is there any truth to the rumor that mortgage rates drop after Presidential elections?  What about changes in trends?   

It's important to note a few things about the history of mortgages in the U.S. before I explain why I am only going back to 1972.  For starters, this is as far back as I could find data on 30 Year Conventional mortgage rates.  Also, Fannie Mae did not begin purchasing Conventional loans from banks until 1972.  And since the price of mortgage securities is the primary factor in determining rates, it only makes sense to compare how those rates reacted to elections held since this fundamental change occured in the mortgage market. 

 

NOV 1972 ELECTION - 2ND TERM OF RICHARD NIXON (Republican).

6 months prior - 7.37%

3 months prior - 7.40%

Election month - 7.43%

3 months after - 7.44%

6 months after - 7.65%

VERDICT - Rates increased slightly after the election.  They also began a long upward trend after this six months shown here.

 

NOV 1976 ELECTION - ONLY TERM OF JIMMY CARTER (Democrat). 

6 months prior - 8.77%

3 months prior - 9.00%

Election month - 8.81%

3 months after - 8.67%

6 months after - 8.82%

VERDICT - Rates fluctuated slightly before the election, dipped only slightly in the three months after and then basically returned to pre-election levels after six months.  However, they began a very sharp upward trend in the months and years following this six months after the election. 

NOV 1980 ELECTION - 1ST TERM OF RONALD REAGAN (Republican).

6 months prior - 14.26%

3 months prior - 12.56%

Election month - 14.21%

3 months after - 15.13%

6 months after - 16.40%

VERDICT - Rates increased sharply in the months after the election, but the trend began way before election day.  It's important to note that inflation was out of control during this period and the Federal Reserve was basically forced to increase short term rates to the point of forcing the country into a recession to get inflation under control.  Although the Fed does not directly control mortgage rates, a steep, prolonged increase in Fed rates will have a long term impact on mortgage rates. 

 

NOV 1984 ELECTION - 2ND TERM OF RONALD REAGAN (Republican).

6 months prior - 13.94%

3 months prior - 14.47%

Election month - 13.64%

3 months after - 12.92%

6 months after - 12.91%

VERDICT - Rates did decrease after the election, but this was in the middle of a long downward trend in interest rates in general  They decreased substantally in the two years following this election. 

 

NOV 1988 ELECTION - ONLY TERM OF GEORGE H.W. BUSH (Republican).

6 months prior - 10.46%

3 months prior - 10.60%

Election month - 10.27%

3 months after - 10.65%

6 months after - 10.77%

VERDICT - Rates dipped right around election month and then quickly returned to the same level they were prior to the election.  Overall, mortgage rates decreased during Bush's term. 

 

NOV 1992 ELECTION - 1ST TERM OF BILL CLINTON (Democrat).

6 months prior - 8.67%

3 months prior - 7.98%

Election month - 8.31%

3 months after - 7.68%

6 months after - 7.47%

VERDICT - Rates did decrease after the election, but again, this was a long trend that began well before election day  Ultimately, rates dropped, increased and then dropped again and ended up about the same at the time of the next election. 

 

NOV 1996 ELECTION - 2ND TERM OF BILL CLINTON (Democrat).

6 months prior - 8.07%

3 months prior - 8.00%

Election month - 7.62%

3 months after - 7.65%

6 months after - 7.94%

VERDICT - Rates dipped around the time of the election and then increased to nearly the pre-election level after six months.  Rates fluctuated during Clinton's second term and ultimately settled at about the same level they were on election day. 

 

NOV 2000 ELECTION - 1ST TERM OF GEORGE W. BUSH (Republican).

6 months prior - 8.52%

3 months prior - 8.03%

Election month - 7.75%

3 months after - 7.05%

6 months after - 7.15%

VERDICT - Rates did decrease after the election.  The trend began several months before election day and continued throughout much of Bush's first term. 

 

NOV 2004 ELECTION - 2ND TERM OF GEORGE W. BUSH (Republican).

6 months prior - 6.27%

3 months prior - 5.87%

Election month - 5.73%

3 months after - 5.63%

6 months after - 5.72%

VERDICT - Rates were on a downward trend before election month, dipped slightly after and then returned to almost the exact level after six months.  Over the course of the next four years, rates had some volatility but remained low and in a tighter range than in the past.

 

NOV 2008 ELECTION - JOHN MCCAIN (Republican) VERSUS BARACK OBAMA (Democrat).

Let's take a look at the rate trend so far year to date:

Jan - 5.76%

Feb - 5.92%

Mar - 5.97%

Apr - 5.92%

May - 6.04%

Jun - 6.32%

Jul - 6.43%

Aug - 6.48%

Sep - 6.04%

The trend of rates has been pretty steady so far this year.  We are within .25% of where we began in January with the largest spikes happening in the summer months.  The bailouts definitely caused a restoration in confidence among investors of mortgage-backed securities, but the effect of this news has already been priced into rates.  In fact, rates have almost completely returned to levels prior to the Fannie/Freddie announcement.   

And please don't take my adding of the political affiliation of each President to mean i'm trying to be partisan or show that one party is better than the other.  I did that so people could draw their own conclusions if they choose.    

And having said that, I firmly believe there's no direct correlation between elections and mortgage rates.  Historically the data doesn't prove this, nor does it even show an immediate change in trends before or after most Presidential elections.  That's not to say that Presidents and their policies don't have an effect on the economy and ultimately mortgage rates.  They can and they do.  But many, many other factors also affect mortgage rates, and those can't be changed overnight by one person.   The policies of the President are one factor in a sea of economic trends and monetary policies of many governments and countries that ultimately affect rates.

However, this election may turn out to be different since we're in the midst of the worst financial crisis in generations.  The markets may ultimately react wildly to the news of whoever ultimately wins the election.  I believe the result will be temporary, and the markets will adjust accordingly to the changing fundamentals of the new market ahead of this major correction. 

For example, if the stock market were to have a kneejerk reaction the day after the election (say a 800 or 1000 point swing, which i feel is certainly a possibility), rates could certainly also follow suit, but i firmly believe they would return to their normal trends, which are governed moreso by longer term patterns and factors within the economy as a whole. 

So don't be surprised if interest rates don't move much in the months after the election.  And don't be surprised if they do.  I've heard some predictions of rates back in the low 5% range, and I have a hard time believing this (but I've been wrong before).  Many economists are predicting the Fed will again lower the Federal Funds rate sometime soon.  Eventually this may lead to higher mortgage rates if the Fed's actions lead investors to fear inflation, or if the credit crisis will ultimately result in higher borrowing costs for the U.S. Treasury.  

Since inflation fears mean higher bond yields, that usually means mortgage rates also increase.  And of course, the global credit crisis will definitely have an impact on the direction of rates, and we do not yet know when the end of this economic challenge will finally come.  The cycle we're entering is literally uncharted territory, and the impending nationalization of many financial institutions may change the market fundamentals in the future.   

 

Does the Federal Reserve Control Mortgage Interest Rates?  Or some other government entity or individual? 

Early this morning, the Federal Reserve announced they were cutting the Federal Funds rate by half a percentage point to 1.5%.   Many people assume this means mortgage rates will automatically follow suit.  Unfortunately this is not how it works.  Many complex factors affect mortgage rates besides the Federal Funds Rate.     

But before we discuss those, let's examine what rates the Federal Reserve DOES control.  The Fed only controls two key interest rates: The Federal Funds Rate and the Discount Rate.  Neither of these are rates charged on loans to consumers.  They are rates that banks themselves are charged to borrow money.  The Federal Funds Rate is the rate that banks charge other banks for short term (usually overnight) loans, and the Discount Rate is the rate that the Federal Reserve charges to lend money directly to banks. 

Having said that, the Fed rates do have a direct effect on some consumer loan rates.  When either of these Fed rates is adjusted, banks will usually move their PRIME RATE, which is the floor rate that is used to calculate many consumer loan rates, such as credit cards and lines of credit.  You may have noticed that credit card companies often quote rates as "Prime plus 5%" or "Prime plus 8%".   The "plus 5 or plus 8" is the "spread" or profit that banks charge to lend money.  So the good news is that a lowering of the Fed rate does often translate into lower rates for consumer loans. 

Here's a chart that shows how closely banks adjust their Prime Rate with movements in the Federal Funds rate:

As you can clearly see, the spread (difference) between these two rates is rather constant.   When one rises, the other one typically follows suit, and vice versa. 

But what about mortgage rates?  While it's true that rates on some adjustable rate mortgages (ARM's) do rise and fall with other indeces that may tend to mirror movements in the Fed Funds rate, fixed rate mortgages do not:

Notice at some points they are within one percentage point of each other, and other times they are more than five points apart. 

So why doesn't the Fed rate affect fixed mortgage rates like it affects the Prime Rate?  The answer lies in how the mortgage market works.  Mortgages are packaged and sold as bond-like financial instruments known as mortgage-backed securities on a market known as the "secondary market".  And since these securities have many similar characteristics as bonds, their price is affected by many of the same factors that affect bond prices, such as inflation, stock prices, unemployment, consumer confidence and the price of competing bonds. 

Some other unique factors also contribute to the price of mortgage backed securities, such as confidence in entity that guarantees timely payments to the investor and lenders' ability to accurately predict the risk of default.   The price and yield of mortgage-backed securities are influenced by all of these factors (plus some other ones) and the rates are ultimately a reflection of the price and yield of these securities.

The secondary market is extremely vital to providing funds to banks for new mortgages.  If banks held these loans on their books, they would run out of money to lend to new customers.  This is essentially how the mortgage market has worked in the U.S. for decades.  Many people had no idea of this until the mortgage crisis shed a light on how this process works.  

At this point, Fannie Mae, Freddie Mac and Ginnie Mae are the only significant players in the secondary market since almost every other significant player is now gone and investors simply refuse to buy mortgages that are not backed by Fannie Mae, Freddie Mac or Ginnie Mae.  This is because Wall Street made huge errors in judging the risk of default for sub prime and Alt A loans, which is one of the root causes of the mortgage crisis. 

Here's one more thing that's a bit off the subject, but many people do not realize.  The bank that collects their mortgage payment probably does not own their loan, they probably just service the loan for either Fannie Mae, Freddie Mac or Ginnie Mae. 

Once a loan is sold, banks will either keep or sell the right to service a loan since Fannie, Freddie and Ginnie do not have customer service departments for borrowers.  Lenders get to keep a fee, called a servicing release premium, in exchange for paying the taxes and insurance from escrow, and providing a customer service department for borrowers that have questions or issues.   They also forward the payments to Fannie, Freddie and Ginnie so they can pay the investors who bought the mortgage bonds. 

Most borrowers never realize this since they may make their payment to the same lender that originated their loan.  Confusing, huh?  Very.       

So in conclusion, THE FEDERAL RESERVE DOES NOT DIRECTLY CONTROL MORTGAGE RATES.  This is probably the one misconception that I hear more often than any other.  The media often oversimplifies the effect that the Fed rate has on mortgage rates, and many lenders use deceptive advertising that implies the two are interconnected just to get a surge in phone calls and applications. 

Fixed rate mortgages quite often move in the OPPOSITE direction of the Fed Fund rate in the short term because a Fed rate cut can often trigger a flood of bond sales by investors.  This happens because a lowering of the Fed rate is often viewed as bullish on Wall Street, which triggers the selling of bonds to free up capital for investors so they can buy stocks.  And when mortgage bonds are sold, they YIELD rises (price and yield have an INVESRSE relationship).  And when the YIELD rises, mortgage rates rise also.

So the next time you hear that the Federal Reserve Bank lowered interest rates, don't assume that means mortgage rates will also drop.  Many complex factors affect mortgage rates.