Mortgages: The Fed Wants To Raise Rates, Blah, Blah, Blah

Mortgages: The Fed Wants To Raise Rates, Blah, Blah, BlahThe Fed’s hint last week that it may again raise mortgage rates sent an instant shudder throughout the mortgage marketplace. Mortgage interest levels for 30-year fixed-rate financing “shot up” into the 3.7 range and the usual dark murmurings about the hideous impact on home sales began to circulate.

We’ve seen this show before.

For much of last year the Federal Reserve mumbled and muttered about a bank rate increase before finally diving into the breach with a minor and woeful December hike that allowed banks to raise the prime rate by .25 percent.

The “prime rate” is, of course, a monument to financial BS. “Prime” is an artificial contrivance generally defined as the best rate available for a bank’s best borrowers except when it isn’t.

“It’s important to note that the Prime Rate is an index, not a law,” explains FedPrimeRate.com. “Consumers and business owners can sometimes find a loan or credit card with an interest rate that is below the current Prime Lending Rate. Lenders will sometimes offer below-Prime-Rate loans to highly qualified customers as a way of generating business. Furthermore, below-Prime-Rate loans are relatively common when the loan product in question is secured, as is the case with home equity loans, home equity lines of credit and car loans.”

The Fed has plainly stated that it hopes and prays for a 2-percent inflation rate in an effort to encourage more consumer spending, the reason for its December hike as well as future increases. For mortgage borrowers – and with them real estate brokers, lenders, buyers, sellers, and state tax coffers – the Fed move seems both deliberate and damaging, the actions of a rogue entity untouched by financial reality.

Mortgages & Rate Hikes

Despite various hints, leaks, policies, and pronouncements the Fed is turning into a financial paper tiger, at least on the mortgage front and maybe elsewhere. Prime mortgage rates went from 3.97 percent just before the December rate increase to 3.58 percent last week, according to Freddie Mac. The Mortgage Bankers Association reported that rates last week stood at 3.63 percent for FHA-backed loans, 2.94 percent for 5/1 ARMs, and 3.83 percent for conforming loans.

What will happen if the Fed raises bank rates in June or July? Ho hum, not much. The Fed does not directly influence or control mortgage rates, the world is flooded with capital, and – as we saw with December’s Fed increase — the mortgage market has proceeded independently on its merry way, governed only by supply and demand, and largely immune from central planners, economic models, and fuzzy notions of how things “ought” to work.

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