Rob's Rant

For anyone who is not employed in the mortgage business, and many who are, rates are very confusing. 

We all heard yesterday that Mr. Bernanke called a special meeting of the Fed Governors yesterday & that the Fed dropped its rate .75%--more than it has lowered in one session in years.

Mortgage rates also went down yesterday--approximately .5% in rate.  Why the difference?

First, we must understand what caused the lower rates we saw.  There was a WORLDWIDE stock selloff yesterday.  All the major markets in the world were a bit panicked.  So people pulled their money out of equities and, in a "flight-to-safety", put their investment dollars, and euros, and yuan, into safe haven bonds.  This drove the price of bonds, including Fannie Mae and Freddie Mac mortgage bonds higher, thereby pushing yields (aka interest rates) lower.

The Federal Reserve Bank saw the worldwide selloff and also reacted.  It lowered the target rate that Banks charge each other (the Discount Rate) by .75% to 3.5%.  This lowered the Prime Rate by the same amount to 6.5%.  While these two lower rates are both related, they are both EFFECTS of the same CAUSE: the worldwide selloff in stocks.

But because one is a Government response, and one is a Market response by individual investors, a difference is to be expected.  Often mortgage rates go the opposite direction from Fed rates, depending on the circumstances surrounding the Fed's moves.

This Fed move sends a strong signal that it will work to maintain stability in the US Housing and Credit markets.  This should (the Fed hopes) allow these markets some breathing room, thereby allowing them to stabilize as planned.  Once they do stabilize, look for investors to pull their money from safe-haven bonds and put it back into stocks again.

It seems that "Helicopter Ben" Bernanke may live up to his nickname after all.  It is assumed the Fed will lower its rate again next meeting, in addition to yesterday's emergency measure.  We shall see.