What Do Fed Rate Actions Do To Mortgage Rates?

Thanks to this chart from HSH, you can see that the answer is "not much", at least not for mortgages based on long-term rates. The Fed changes the short-term or "overnight" rates to affect the costs of borrowing so that institutions and individuals will be more or less inclined to borrow to fund growth or expenditures. Higher rates means less spending, and the Fed has recently raised rates 17 times to try and slow down our hot economy to a more sustainable pace.

Mortgage rates are determined by the trade value of mortgage backed securities (RMBS), which are bond-type securities whose cashflow is generated by mortgage debt. The liquid value of these bonds reflect longer-term expectations of economic performance, and do not always move with the Fed Funds rate.

Back when the Fed was still raising rates (the incline on the tan line), there was a lot of expectation that this would pressure up the other longer-term rates. But it didn't, and we wound up with a flat and inverted yield curve. Then we heard an ongoing debate between economists who felt the inverted yield curve indicated the foretelling of a recession, and those who felt that this was a poor predictive tool. Now there are more folks on the recession bandwagon...

A higher Fed Funds rate does affect homeowners with significant home equity lines of credit however. HELOCs are based on the Prime rate, which moves in lock-step with the Fed Funds rate. If you have a sizable HELOC, you've probably already noticed your financing get a little top-heavy over the last few years. You will see some relief if the Fed starts to cut rates soon.