The ability to look beyond the now and develop strategies that prepare an organization for future success is key to any leadership position in almost any company. This is true for the mortgage industry and especially for the long-term strategies we have developed to respond to the current low interest rate environment triggered by a global pandemic.
One of the most intriguing factors in lowering rates was the decoupling of duration and swap spreads for mortgage-backed securities, which analysts ironically expected to be short-lived in 2020. That rally caused interest rates to decline, attracting millions of homeowners to refinance their current home loans through 2020, resulting in unprecedented credit levels for the entire mortgage industry.
While much of the mortgage industry has been fixated on low mortgage rates for the past year, it’s important to understand the anatomy of interest rates. In the US, the federal funds rate refers to the rate banks can charge other banks when they lend excess cash from their reserve balances overnight. In addition to affecting the stock market, this interest rate can also affect short-term mortgage and credit card interest rates. This rate is also set by the Federal Open Market Committee.
While they cannot dictate a specific tariff across the board, that is Federal Reserve can adjust the amount of money so that the interest rates approach the target rate – as they increase the amount of money in the system, interest rates fall, when they decrease the amount of money, interest rates rise. This rate is set eight times a year based on economic conditions.
During the last year Fed Chairman Jerome Powell consistently promised the Fed would continue to buy mortgage-backed securities to stabilize the American economy, increasing the amount of money in the Federal Reserve System and lowering interest rates.