June 2007
"Who Controls Mortgage Interest Rates, Anyway?"Take this short quiz to test your knowledge of mortgage interest rates.
True or False:
A: The President meets with his financial advisors quarterly to decide if rates should go up or down or stay the same
B: Mortgage interest rates are based on the value of the dollar
C: Mortgage interest rates are set by the commodities market
D: Ben Bernanke analyzes the market quarterly and sets the interest rate for 30-year fixed mortgage loans
E: Mortgage rates are affected somewhat by the weather in New York compared to Tokyo
F: 30-year treasury bonds directly affect 30-year fixed mortgage rates
G: Every credit union and bank sets their own mortgage rates based on prime
If you answered false to all the statements above, congratulations! You're right. If you thought one or more of the statements above were true (well, unless perhaps you answered true to "e"), you're not alone. Mortgage rates-and how they are set-are probably one of the most misunderstood aspects of finance.
But they shouldn't be, because the facts are really simple. To prove just how simple they are, we've broken them down into 8 bite-size pieces.
Fact #1: The Federal Reserve do not set mortgage interest rates. The rate set by "the fed" is the federal funds rate, which is the rate at which banks lend money to each other.
Fact #2: The federal funds rate reflects short-term lending.
Fact #3: Mortgage loans are the ultimate in long-term lending.
Fact #4: When short-term rates go down, people generally borrow and spend more. That kind of consumer behavior can cause inflation.
Fact #5: When there is concern about inflation, long term rates go up. Therefore, when the fed cuts the rate, mortgage rates may go up, not down.
Fact #6: However, it's only possible that they may go up; it's not certain that they will, because it's not certain that consumer behavior will change or that concerns about inflation will rise.
Fact #7: But that's only half the answer, because mortgage rates are really affected by something else and that is the Mortgage Backed Securities, or MBS. The Mortgage Backed Securities are bonds issued by Fannie Mae and Freddie Mac.
Fact #8: When the MBS bond prices go up, the interest rates go down. When bonds go down, rates go up.
Does any one person control the interest rates?
Thankfully, no. Interest rates in the United States are part of a broader financial system that has consistently kept our country one of the wealthiest on the globe.
For more information on Great Basin Federal Credit Union's mortgage program, contact our Mortgage Loan Officer, Cindy Kendall at 775.789.3117 or via email at cindyk@greatbasin.org.
