Page 23 - Sonoma County Gazette January 2016

The Fed Raised Rates... So What?
If I had a dollar for every conversation about the Fed raising rates I would have many dollars and I could buy lunch with that money. Um, yeah so get to the point Hans.
The point is that I have read a lot about the Fed raising rates and I have tried to explain to many people what that means and how the Fed rates and mort- gage rates work together but the truth is that unless you are buying a house or refinancing your mortgage right now, you probably don’t care and if you do care right now, you won’t care soon enough.
Definition: The Fed funds rate is the target interest rate banks charge each other to borrow fed Funds overnight. They need these funds to maintain the Federal Reserve requirement. That is the amount the nation’s central bank, the Federal Reserve, requires they keep on hand each night. That prevents them from lending out every single dollar they get. It makes sure they have enough cash on hand to start each business day.
So when the Fed fund rate changed from 0.25% to 0.50% on 12/16/15 it did not have much effect on mortgage rates at all. It did have a direct effect on the Prime rate which is 3.00% higher than the Fed Funds rate. So the Prime rate is now 3.50% and this has a direct effect on Home Equity Lines (HELOC’s) and credit card rates. Both of these loans charge a fee based on the prime rate plus a margin to arrive at the final rate. So all of these loan rates went up by .25% on 12/16/15.
Mortgage rates are based on how MBS is trading (Mortgage Backed Securi- ties) and the economy and wall street has a big effect on what is happening with MBS rates which has a direct effect on what interest rates you get from your local mortgage broker or banker. This can and does change every day just like the stock market. I watch MBS markets every day to get a feel for what is happening so I can help my clients make well informed decisions.
The bottom line is the Fed funds rate and what the Fed is doing has an effect on markets but the stock market and the MBS markets both had anticipated
a raise in rates and had reacted to it already and so it was really a non-event.
I expected the market to react a little too strong and then look back and real- ize that we already priced in the effects and correct. I was wrong, there was a small blip and a small correction and not much actually happened.
I am reminded of a story from my childhood about Chicken Little worried about the sky falling. I did not even want to write about this but the main- stream news just takes it and twists it to get a rise out of people and I hope to be a voice of reason. That being said, the only thing I know for sure about rates is that they will change. Mortgage rates in 1985 were 11.50% and in 2000 they were 7.50% and right now they are about 4.00% so we are in a pretty good spot now and rates are due to go up as the economy gets better.
Need to know more? Please send me your real estate and mortgage related questions. I am happy to answer you and it may become the topic of a future article.
Hans Bruhner (NMLS 243484) is a mortgage advisor for Pinnacle Capital Mortgage (NMLS 1071). Both are licensed by the Department of Business Oversight under the CRMLA. If you have a question, please contact Hans at (707) 887-1275 or hans@hansblog.com
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