The Importance Of Language

Adjectives play an important role in the English language -- they modify nouns.  Because of adjectives, we can linguistically separate good movies from bad movies, rainy days from sunny days, and sore losers from lovable losers.

Sometimes, adjectives are superfluous.  For example, you know this is a mortgage blog so when yours truly writes "rates are lower", it's implied that I'm talking about mortgage rates. I don't need to constantly say "mortgage rates".

Other times, though, omitting adjectives leads to misunderstandings. It happens nearly every time the Federal Open Market Committee meets.

Here's why.

Explaining the FOMC In Layman Terms

The Federal Open Market Committee is a government group that makes monetary policy. It's job is akin to the gas-and-brake pedals on a car -- speed up or slow down the vehicle that is the U.S. economy.

The FOMC has 12 members and is headed by Chairman Ben Bernanke.

8 times annually, the Fed gets together to discuss a host of economic issues and, when the meeting is done, the members vote on whether to raise, lower, or leave unchanged an interest rate called the Fed Funds Rate.

The Fed Funds Rate is the prescribed interest rate at which banks lend money to each other overnight.

Simplified, when the Fed Funds Rate is high, banks end up paying a lot of money in interest payments and are less inclined to borrow from one another, thereby slowing down the economy. When the Fed Funds Rate is low, borrowing is cheap, and the economy is spurred forward.

Because the Fed Funds Rate is directly related to Prime Rate, the basis of business and consumer borrowing, the FOMC's vote carries huge implications for the economy as a whole.

The FOMC Does Not Vote On Mortgage Rates

The FOMC meets today and adjourns at 2:15 PM ET.  The group is expected to leave the Fed Funds Rate unchanged within its current range of 0.000-0.250 percent.  This is the lowest Fed Funds Rate is history and the Fed has said that the Fed Funds Rate will stay near zero for "an extended period".

However, by 2:30 PM, news stories will surface online about how the Fed voted to "leave rates unchanged" today.

And this brings us back to adjectives -- implied or otherwise.

See, the proper verbiage from the press would be "the Fed voted to leave the Fed Funds Rate unchanged today", but that's not how the headlines will be phrased.  They'll just say "rates".

This is a big deal only because most Americans don't know what the Federal Reserve's true scope is; they never learned what the Fed does for the country, or how it does it. It's the main reason why, in my experience, Americans tend to think that the Federal Reserve controls daily mortgage rates.

It doesn't. But... Because of this misconception, when Americans read about the FOMC and "rates", they just assume the story is about mortgage rates.

It's not.

Comparing The Fed Funds Rate To Mortgage Rates

The FOMC doesn't control mortgage rates.  If it did, the chart at top would be less staggered.

Going back 20 years to 1990, the relationship between the Fed Funds Rate and the 30-year fixed rate mortgage has been indirect, at best.  The spread in rates has been as narrow as 1 percent and as wide as 5 percent.  There was even a period in the 1970s and 1980s where the spread went negative; where mortgage rates were lower than the Fed Funds Rate.

And if you need to know the biggest reason why the Fed Funds Rate is untied from mortgage rates, it's because the Fed Funds Rate is an overnight rate and the 30-year fixed rate is a long-term rate.

Borrowing money is much different over 8 hours as compared to 263,000 hours.

Make A Mortgage Rate Lock Plan Ahead Of The FOMC

It's imprudent to float a mortgage rate ahead of an FOMC meeting. Despite the near-universal belief that the Fed Funds Rate won't be changed, there's always the chance that the Fed says something "good" for the economy, causing mortgage rates to spike.

It's happened in the past and it could happen again.

If you're shopping for a mortgage or otherwise not locked in, talk to your loan officer in advance of the Fed's 2:15 P.M. ET announcement. Rates may not rise, but then again, maybe they will. It stinks to be on the wrong side of that bet.

Or, if you don't have a loan officer, with your details and I'll lock your rate for you on the spot.

Need a mortgage rate prediction? I am a regular participant in the Bankrate.com Mortgage Rate Trend survey and this week's survey may help you.

Conventional, Conforming Mortgage Rates

By way of disclosure, the Bankrate.com survey is for conventional, conforming mortgages only. It does not apply to FHA mortgages or jumbo mortgages. Nor is the survey specific to North Carolina or Texas mortgage rates. Furthermore, unique property types including non-warrantable condos and condotels may be excluded.

for a real-time rate quote.

Breaking Down The Predictions

Here's the group's mortgage rates predictions:

• 33% predict mortgage rates will increase
• 8% predict mortgage rates will decrease
• 59% predict mortgage rates will remain unchanged

I expect mortgage rates to decrease.

My advice not be appropriate for your individual situation and I'm not always right. Ultimately, you may find your time better spent watching the 3rd best Saturday Night Live Opening Monologue of all-time than reading my analysis.

Either way, here's what I told Bankrate.com:

"The complete absence of inflation leads rates lower."

For all this talk of the Federal Reserve ending its support for mortgage markets, a more insidious force on rates is inflation.  And without inflation, U.S. mortgage bonds go in demand.

What Is Inflation?

There is a daisy-chain relationship between inflation and mortgage rates and it's a simple one to understand.

First, a definition. Inflation is the devaluation of a currency. For example, if you can buy a loaf a bread, container of milk, and stick of butter for $5 today but the same groceries costs you $5.50 next year -- all things equal -- that's an inflation rate of 10%.

Most people look at this and say "prices went up". That's one way to look at it. Another perspective is that the dollars in our wallet are less valuable than they used to be.

This is how markets view inflation.

Inflation Is The Enemy Of Mortgage Rates

With respect to mortgage bonds, inflation can be devastating.  This is because mortgage bonds are denominated in U.S. dollars and all coupon payments are made in U.S. dollars.  If the dollar is losing value, mortgage bonds become less attractive to investors.

Less demand drives bond prices down which, in turn, push bond yields up. Mortgage rates rise.

Even worse is that it doesn't take actual inflation to make mortgage rates rise.  Even just the threat of inflation can do the job.  This was the case in June 2009 when mortgage rates leaped 1.125% in 10 days.  If you were shopping for a mortgage at the time, you remember how scary it was.  Lenders were issuing up to 5 rate sheets in a day.

But without inflation -- or the threat of it -- mortgage rates can benefit.  And that's what we're seeing now.

• The Federal Reserve says inflation should remain low for a while
• The Producer Price Index is dropping
• The Consumer Price Index is dropping

Each of these points makes market feel like inflation is a ways away. As a result, mortgage bonds are in demand.

No inflation, no rise in rates.  At least for now.

Rate Increases Aren't Out Of The Question

If you need a rate lock, consider taking it this week.  Timing still looks right and locking a rate can never be wrong.  The wildcard here is the Fed's termination of its $1.25 trillion support for mortgage markets.  It's possible that markets could spook when the program ends March 31 and that could send rates northward.

Rates are down 1 percent since the program started and it's reasonable to expect them to give back some -- or all -- of the improvements once the Fed bows out.

You're playing with fire if you ride this out too long. For now, though, float.

Ride It Out, But Be Ready To Lock

Mortgage rates change all the time. Make sure you're not locking too soon. It can be the difference between saving 1/8 percent or losing it. You're going to want your loan officer to help you with timing.

Or, if it's easier for you, with your situation and we'll get you set up with the lowest rate we can.

I am a regular participant in the Bankrate.com Mortgage Rate Trend survey and this week's survey is now available.

The Bankrate.com survey is for conforming mortgages.  It does not apply to FHA mortgages, VA mortgages, jumbo mortgages, or foreign national mortgages.  For rate quotes, .

The group's 30-day prediction for mortgage rates:

• 31% predict mortgage rates will increase
• 31% predict mortgage rates will decrease
• 36% predict mortgage rates will remain unchanged

I am predicting that rates will decrease over the next 30 days. My prediction may not be appropriate for your individual situation and it may be wrong, too.

Here's what I told Bankrate.com:

"The U.S. has established itself as the best of the world's worst economies. The dollar gains, mortgage rates fall."

The U.S. Dollar plays a large role in setting mortgage rates for Americans. It's not an obvious connection because most people don't know what sets mortgage rates in the first place.  In one sentence, mortgage rates are "made" from the price of mortgage bonds using a mathematical formula.

The way that a mortgage bond works is that an investor buys the security and the receives interest payments at a regular rate over a period of time. Those payments are made in U.S. Dollars.  And this is why mortgage rates are closely tied to the fate of the dollar.

If the U.S. Dollar loses value versus the world's currencies, the dollar-denominated mortgage bond interest payments lose value, too, in relative terms. As a result, investors sell their holdings which increases the open market supply, and causes bond prices to fall.

In Bond World, prices and rates move in opposite directions. As bond prices fall, mortgage rates rise.

The reverse is true, too.  When the U.S. Dollar gains in value, the lure of mortgage bonds grows, helping mortgage rates to fall. 

The dollar is not the only reason why mortgage rates move each day, of course -- there are literally hundreds reasons why -- but its influence can be quite strong when the greenback goes on a run.

Now may be one of those times.

As tales of economic despair emerge from nearly every country on Earth, investors are seeking safer places for their money.  Versus the 2005-2006 plan of stashing cash in high-risk, high-return countries, investors now direct funds to relatively large and stable economies, including the United States.

It's not to say that the U.S. economy is healthy, but versus everyone else, we're golden.  Remember: The government now owns Fannie Mae and Freddie Mac and it can print as much money as needed to pay interest to mortgage bond holders.

For now, this is awesome for rates.  Investors are buying up bonds and rates are hovering near 5 percent when all the economic data says we should be near six instead.  It won't last forever, though. Someday, monetary supply inflation will set it.  When it does, the dollar's value will plummet and mortgage rates will soar. 

It could happen in the next 12 months, the next 12 weeks, or the next 12 days.

So, if you're wondering whether or not "now" is a good to refinance to refinance, consider that the U.S. dollar is holding rate down right now and that's lucky for rate shoppers. However, rates really can't fall all that much further from where they are right now, and they do have the potential to rise by a lot in the near-term.

Make sure you don't miss real-time changes in the mortgage market, watch for my Twitter feed at http://www.twitter.com/mortgagereports. I post several updates each day as mortgage rates are moving.