Many people are reaching out with a lot of questions about the recent Federal Reserve actions as COVID 19 escalates, so I'm posting here to hopefully help folks understand it a bit better:
The FED took three actions today March 16, 2020:
1.) reduction of overnight lending rate to 0.000 - 0.250%.
2.) purchase of 700B in Mortgage Backed Securities & Treasury bonds.
3.) re-enacting the quantitative easing.
Here is what you need to know about the FED's action and how it is impacting mortgage rates & housing...
The federal funds rate is the overnight borrowing rate that banks get when they borrow money from the federal reserve. This rate was 1.000 - 1.250% last week and now it’s 0.0 - 0.25%. This is not the same as mortgage rates...
The FED's did this to stop the rise of interest rates because when the stock market crashed last week, banks started selling their treasury bonds in order to get more liquid cash due to people withdrawing cash and demanding cash from banks. Banks needed more liquid funds so they sold off their treasury bonds. And because of this, we saw mortgage rates skyrocket last week in a matter of 24 hours where they moved up 1% back into the high 3s and low 4s. Obviously the FED's don’t want this as it will hurt the housing market which so far has remained strong during the corona virus market crisis.
So what happens next?
We believe this will give Banks the liquidity they need to stop selling off their treasury bonds and it will cause mortgage rates over the next few weeks to go back down to the low 3s, and possibly even high 2s, which is the lowest point we’ve seen them. This does NOT mean that someone can get a 0% or a 0.250% interest rate. There will likely be a lot of confusion about this in the coming weeks.
We hope this helps explain what just happened. The fed is trying to keep rates from going up which is what started happening last week and they are trying to get them back to the record lows we saw 10 days ago which is good for everyone.