Curve

Emergency “double” Fed rate cut pushes mortgage rates to record lows

Craig Berry
The Mortgage Reports contributor

Federal Reserve cuts rates by 0.50%; mortgage rates fall to their lowest ever

Less than three months ago, the Federal Reserve announced it wouldn’t touch interest rates in 2020.

Then coronavirus spread. The stock market plummeted, and the Fed did a 180.

Then the Fed did something it hadn’t done since the financial crisis of 2008. It called an emergency meeting and cut the federal funds rate. And it was a “double.”

Typically, the group cuts rates by 0.25% at a time. This one: 0.50%.

As of Monday, mortgage rates hit their lowest average on record, according to Mortgage News Daily.

Loan type Current Rate for July 9, 2020* APR
Conventional 30-year

3%

3%

FHA 30-year

2.375%

3.352%

VA 30-year

2.25%

2.421%

Rates could inch lower still, and borrowers should be prepared to lock a rate as soon as possible — whether that’s today, this week, or next.

Find a mortgage rate and prepare to lock today (Jul 9th, 2020)

*Rates reflect the lowest available for a “prime” borrower through the Mortgage Reports lender network. Your own rate will vary. See our full loan assumptions here.

Why the Federal Reserve issued an emergency rate cut

Coronavirus has rocked financial markets worldwide. Evidently, the situation is so serious that the Fed needed to take immediate action to help stabilize the US economy.

The group was set to meet on March 17-18 and markets expected a cut at that point. But no one predicted an emergency meeting to soothe markets before that point.

On Friday afternoon, Federal Reserve Chair, Jerome Powell said they are closely monitoring the coronavirus and would “use our tools and act as appropriate to support the economy.”

The Federal Reserve doesn’t control mortgage rates. But its decisions impact the way most interest rates move.

That means lowering the fed funds rate — the target interest rate for banks to borrow from one another overnight.

The fed funds rate doesn’t dictate mortgage rates. But a rate cut by the Fed still has an impact on the overall market environment, which in turn impacts mortgage borrowers.

>> Related: Streamline refinance — get today’s rates with almost no paperwork

What can borrowers expect when the Fed meets later this month?

Just because the Fed issued a surprise rate cut doesn’t mean one won’t happen again during its regularly scheduled meeting in mid-March.

Given an economic slowdown and lower interest rates worldwide, the Fed may elect to lower the target level of the federal funds rate even more.

According to the Fed Chair, the “fundamentals of the U.S. economy remain strong.”

But he also noted that “the coronavirus poses evolving risks to economic activity” and that the Fed “is closely monitoring developments and their implications for the economic outlook.”

The Fed just cut its rate by 0.50%. Will they cut again on March 18?

The central bank cut borrowing costs as new coronavirus cases outside China continue to mount. Economists are listening to Mr. Powell’s statements in coming days for any additional stimulus to offset any economic fallout.

The emergency rate cut was clearly an attempt to quiet some of the fears. But it’s also a strong indication that another rate cut is possible.

So how much of a rate cut could you expect to see in total? Markets are still unsure, but another 0.25% is not outside the realm of possibility.

With a 180 degree turnaround since December, we could see HELOCs, credit cards, and other types or rates 0.75% lower than they were at the beginning of March.

These are substantial cuts, given that the fed adjusts its rate by 0.25% at a time.

Verify your new rate (Jul 9th, 2020)

Mortgage-backed securities and other factors impacting rates

Like we said above, the Federal Reserve is not in charge of mortgage rates. There are plenty of other factors pushing today’s rates down.

Another huge reason mortgage rates are so low has to do with basic supply and demand for something called “mortgage-backed securities.” Here’s how it works:

A financial instrument known as mortgage-backed securities (MBS) controls the ups and downs of interest rates for mortgages. And MBS have to answer to end investors, namely investing groups that collect interest on those mortgages.

When the stock market is in turmoil — as it is now — investors tend to move money into “safer” investments like MBS.

That means as the value of MBS goes up, there’s more demand — and mortgage rates, in turn, go down.

We saw exactly that happening last week in real-time.

On Friday, the Dow was down 350 points, after being down around 1,000 points earlier in the day.

For the week, mortgage-backed securities (MBS) rose about 1 and 8/32 points (a huge move for MBS, which typically only move a few 32nds each day).

As a result, some favorable repricing was seen from mortgage lenders. And if more investors continue flocking to MBS, we could potentially see rates go lower still.

Find a low mortgage rate today and prepare to lock (Jul 9th, 2020)

How coronavirus (COVID-19) has turned U.S markets inside out

The coronavirus has traumatized companies and investors around the world to their cores, impacting both Wall Street and the mortgage marketplace.

Most of China remains shut down by the coronavirus, which first emerged in the Chinese city of Wuhan and has sickened thousands of people in around the world.

The sudden standstill to business for many global companies can have significant effects that impact far more than just China.

According to the New York Times, many companies “have come to rely on China for its efficient factories, and its increasingly affluent consumers and its years of hard-charging economic growth.”

General Motors, Ford, Nissan and other auto companies have temporarily closed factories. Apple and Starbucks have closed stores.

The global economic outlook, the fortunes of major companies and the jobs of workers around the world could depend on how quickly they come back.

Stock market indexes have slumped on virus worries. And money has been pouring into United States government securities as people look for safe investments, pushing prices up and sinking yields on 10-year Treasuries to record lows.

When there is investor uncertainty, money tends to flow into the United States, the world’s most stable market. With more money in domestic markets interest rates tend to fall.

While this can be bad news for many stock investors, it can be good for mortgage borrowers.

Lock a rate now or wait and see?

A Fed rate cut directly impacts Home Equity Lines of Credit (HELOCs). However, a rate cut won’t impact most mortgage rates directly.

Mortgage and refinance rates have already been tumbling in the past few weeks thanks to the effect of Wuhan coronavirus.

The main force pushing mortgage rates down right now is the Wuhan coronavirus.

Mortgage rates could drop again, or suddenly skyrocket. Coronavirus news will likely be the determining factor.

Lenders have already priced in a Fed rate cut… there’s a chance that rates could remain relatively unchanged even with this unexpected 50-basis-point cut.

But remember that lenders have already priced in a Fed rate cut… there’s a chance that rates could remain relatively unchanged even with this unexpected 50-basis-point cut.

Then again, there could be a short window of sub-3% rates that home buyers and refinancers will want to take advantage of.

Verify your new rate (Jul 9th, 2020)

Consider a “float down provision”

For mortgage borrowers that need to lock in their rate now, there is one strategy worth exploring.

This is especially for those that think rates may go even lower. Ask your lender if they have a “float down provision.”

Some lenders allow you to float down your locked-in rate should rates go lower before your loan is set to close.

Typically, lenders have provisions that say how far rates need to drop in order to take advantage of a float down.

For example, if rates dropped by half a point, your lender may allow for a one-time float down by a quarter of a point. Many lenders also require that you be within two weeks of your closing date to exercise a float down.

Float down agreements vary among lenders so be sure to ask how the program works, what’s allowed and what isn’t.

What to do this week in light of the Fed rate cut

Regardless of whether you’re already locked in now, about to lock, or you’re going to wait it out to see what happens after the Fed meeting, one fact remains true.

You’re most likely getting a rate that’s at or near its lowest in U.S. history.

Find out what rate you qualify for today.

Verify your new rate (Jul 9th, 2020)