Bankrate has a really interesting article about the effect that the Fed’s rate cuts are having on the mortgage industry. As constant readers of the site are already well aware, the subprime meltdown has lead to a crisis in the secondary mortgage market—investors are no longer interested in purchasing non-conforming loans.

Non-conforming loans include the troubled ARM loans as well as “jumbo” loans. Jumbo loans are those mortgages over $417,000.

One of the goals of the Fed’s rate cut was to “unstick” the jumbo loan market. Will it work? Who knows… What we do know is that it doesn’t necessarily mean that mortgage rates are going to drop. In fact, according to Bankrate, they’ve already dropped and now are rising again. Bankrate explains:

So why did mortgage rates go up this week, instead of heading down? Mortgage rates got ahead of the Fed, that’s all. Two months ago, the benchmark rate on the 30-year fixed was 6.82 percent. Not long after, investors started to get clued in that the Fed really might cut short-term rates — and mortgage rates have fallen in six of the nine weeks since then.

How much did rates fall since that mid-July peak? Last week, they had fallen 54 basis points. This week, the Fed cut short-term rates by 50 basis points, and the 30-year fixed went up 4.

In other words, both the federal funds rate and the 30-year fixed have fallen by identical amounts in nine weeks. The Fed was just catching up.

Seem strange? Here’s an article from the Sep. 13 Washington Post about the sharp drop in 30 year fixed rate mortgages. The fed cut rates on Tuesday, Sep 18.

Mortgage rates rise slightly [Bankrate]
(Photo:decaf)

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