There was a bet here in my office (I made it) about how many people would call or email us wanting to know how much lower mortgage rates went after Greenspan and his buddies lowered the Fed Funds rate to 1. That’s right. 1. Sure enough, the emails soon began pouring in. Dave, Dave! How much lower did my rate go? Guess what, thanks to the Feds, your rates went up. Not down. I tried to tell ya, but you wouldn’t believe me.

It still amazes me the amount of bad information that floats around out there. “Mortgage Rates are Tied to the 10-yr Note” (false), “Fed Cuts Funds Rate, Lower Rates Ahead” (yeah, whatever). The Federal Reserve Board can do a lot of things and a couple of them are adjusting the Fed Discount Rate (the rate used to charge commercial banks for borrowing money from the Federal Reserve) and the Federal Funds Rate (the rate institutions charge each other for overnight lending) but one of them is not adjusting your mortgage rate.

Yeah, there are mortgages that can be affected by Fed moves, such as certain adjustable mortgages tied to Prime (again, banks set that index, not the Feds) but overall the Feds don’t have anything to do with your 30 yr fixed rate. What the Feds do is try and stimulate the economy by making money cheaper and easier to acquire in rough economic times.

If investors think the economy is sufficiently stimulated they’ll pull money out of something boring like bonds and into something a little sexier like the stock market. If the stock market is still a little too risky, they’ll simply sell their bonds and park their money in cash somewhere. When people sell bonds and buy stocks, those bonds have to increase their yield to the investor to make them more attractive. That yield is your fixed rate. What you’re seeing now is a sell-off in mortgage bonds, increasing your rate.

Will the trend continue? No one knows, they only “bet.” Right now they’re betting that the best of bond days are over. Remember, perhaps the best investment over the past 2 years has been bonds so many will cash in their winnings and go home. Some might put their money back in the stock market, some might put it in a bank account. But either way, what you’re seeing now is the mantra “fixed mortgage rates are always higher after the last cut.” The trick of course is guessing when that last cut will actually take place.

So what do you do now? If you’ve been trying to outsmart the markets because you believe a 3.00% 15 yr fixed rate is just around the corner, think again. The train may indeed be leaving the station. Jump on the caboose before you miss these rates entirely.

Published: June 27, 2003

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.