Federal Reserve Slashes Rates. Will it Lower Mortgage Rates?

Will the Federal Reserve announcement to lower the Fed funds rate lower mortgage rates? Yes.

I know, I am about to get lots of emails and calls from mortgage loan officers and real estate agents telling me that Fed short-term rates are not tied to long-term mortgage rates. Point taken, and consumers should not expect the Fed floating target rate of 0.25-0 percent to show up on their mortgage payment coupon. However, the latestFOMC announcement will lower mortgage rates.

The announcement of a historically low and unprecedented Federal funds rate target is significant. However, the statement that is most likely to hit your mortgage rate is this one:

"over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant."

This reinforces the more frequently discussed US government strategy to push rates down to 4.5 percent--because bidding and buying mortgage-backed securities does directly correlate to mortgage rates.

In addition, continued weakness in the economy is showing an enormous appetite for government-backed debt and securities. Investors willing to trade yield for safety. This was evidenced by the US Treasuries recent issuance of debt at 0 percent, that drew four time the normal volume.

So, mortgage rates will go down, but what does this mean to you as a homeowner and borrower. Many mortgage loan officers are issuing warnings about misinterpreting or timing this good news on mortgage rates.

"I am afraid many will attempt to refinance and can't because of descending property values," says Michigan loan officer Tom Vanderwell. "However, my bigger fear is that homeowners and buyers will wait for a mortgage rate that never comes."

This could be a real concern as financial pundits, like Jim Cramer a CNBC commentator, spout predictions of 3.5 percent 30-year fixed-rates.

Again, Vanderwell puts this danger in perspective: "Assuming the average price of a home in the nation (a little over $220,000) and a 20% down payment, a 1% drop in rates would make approximately a $90 a month difference."

It looks like for $90, a bird in the hand is worth 1 percent in the bush.