Even Obscure Items Can Affect Your Mortgage Rate
Interest rates go up and go down. Usually, the movement comes from changes in the policy of the Federal Reserve couple with inflation outlook by consumers and professional. But even obscure items or policies can affect your mortgage rate. That’s well known and home buying and refinancing goes in cycles depending on those rates.
Not only is the Fed raising rates almost monthly, it is selling assets. That’s important because the Fed buying assets kept rates lower in 2020 to mid 2022. The buying reinforced the near zero rates. Now that it is selling, it is having an opposite effect. Why? There needs to be a buyer for those sales of bonds. And buyers are hesitant. They’ve been badly burned, even leading to the 2nd, 3rd, and 4th largest bank failures in history. In a span of 45 days in March/April 2023. 2024 is looking like loan default and foreclosures will rule the market.
Take this example from 2021. One additional items affecting interest rates and mortgage rates hit on Thursday, March 18. Although the Federal Reserve held its short term rates near zero on March 17, on March 18, the Federal Reserve declined to extend a risk capital waiver for bank deposits and treasuries. OK, so what? After the first stimulus in March, savings rates soared and banks received boatloads of deposits. As a result, they bought treasury bonds issued by the government which the government used in borrowing to pay out that stimulus money. Banks are required to hold a certain amount of cash to counter-balance the amount of deposits and it affects capital accounts and risk weightings of the bank.
Federal Reserve Waivers and Waiver Ends
A year ago, the Federal Reserve implemented a waiver to exclude those amounts to help meet the demand for loans (Paycheck Protection Loans and otherwise). With the initial flood of deposits though, banks bought treasuries as there was a limit on PPP loans. The increased demand for treasuries pushed down interest rates. This led to lower mortgage rates. Then a second round of stimulus added to that decrease in rates. The expectation of the stimulus near the end of the year pushed rates down to the lowest levels.
Despite the third round of stimulus starting March 2021, rates didn’t continue to fall. The market correctly realized that only a tiny part of the third “stimulus” was like the prior two rounds. The third round was a spend, spend, spend mess unrelated to Covid and individuals in need. As a result, the third round actually pushed up interest rates on fears of inflation due to the spend, spend, spend.
Now, the Federal Reserve has declined to extend its waiver and means banks may need to sell treasuries to move to the money to cash which wasn’t required before. Or, they may need to fire some customers to lower deposits. JP Morgan Chase (Chase Bank) is possibly in this position of firing customers! This reverses the year ago buying that drove down rates and may lead to an even greater upward push on interest rates in the short term. The waiver ends March 31, 2021.
Will this blip in the rise in interest rates level out and slightly reverse to meet our buying/financing forecasted timeframe? Stay tuned to see if this affects your mortgage rate!