By Carissa Abazia
The Federal Fund Rate is the overnight borrowing rate that banks get when they borrow money from the federal reserve. This rate was 0.75% last week and now it is 0.00% to 0.25%.
There are a lot of questions out there about the interest drop the Federal Reserve just completed. The Federal Prime Rate is not tied to mortgage interest rates.
The fed did this to stop the rise of interest rates because last week the stock market crashed. Mortgage lenders also started selling their treasury bonds in order to get more liquid cash. They did this because people are withdrawing cash and demanding their cash from banks.
Lenders need more liquid funds, and because of this, we saw mortgage rates spike last week, the week of March 9th. In a matter of 24-hours, rates moved up 1% into the high 3s and low 4s. Obviously, the Feds do no want this as it will hurt the housing market, which so far has remained strong during this crisis.
So what happens next?
We believe the Fed will give banks the liquidity they need to stop selling off their bonds and will raise rates to lower over the next few weeks. These are some of the lowest rates we’ve seen in years. I started working for my father, a mortgage broker, when I was 14 years old and remember seeing rates in the 8s.
Today, this does NOT mean that someone can get a 0.00% or a 0.25% mortgage interest rate. There will be a lot of confusion about this in the coming weeks.
Thanks for reading!