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Read more on our COVID-19 Resource Guide.

It seems like all anyone is talking about right now is the coronavirus (also known as COVID-19), and this phenomenon has hit the Federal Reserve now as well. It’s part of the Fed’s mission to try to maintain as close to full employment as possible and major economic disruptions caused by pandemics are a serious threat to that goal. In an emergency meeting yesterday, the Federal Open Market Committee took action.

The first thing done was to cut short-term interest rates by a full point to a range of 0% – 0.25%. Although they don’t necessarily move completely in tandem, there is often a correlation between lower short-term rates and the lowering of longer-term rates for things like mortgages.

The Fed also announced some asset buying we’ll get into below that should help support the mortgage market. It’s a bit complex, but it’s the type of move that supports lower rates.

In addition to the move with the Fed funds rate and the asset buying, the committee also lowered rates on one of its biggest sources of emergency funding in order to encourage banks to feel free to borrow from it in order to keep up with consumer demand for loans during the COVID-19 situation.

Additionally, they took the reins off reserve requirements for banks. Normally, lenders are required to have a certain amount of cash held back to show solvency and protect the stability of the system. In the short term, the Federal Reserve has greatly loosened these controls. If banks aren’t required to hold onto funds as much, they can do more lending to support consumers.

The Federal Reserve did some other things aimed at boosting the economy in the short term in response to the virus, but the important thing to know is that things are volatile right now. If you’re interested in a mortgage, definitely consult a Home Loan Expert. We’re here to help! You can also give us a call at (800) 785-4788.

With that said, let’s get into the analysis. The statement from the FOMC is below. My comments are in bold.

The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.

This is usually what we like to think of as the report card paragraph, and it still is. However, from the beginning, the FOMC is acknowledging that things are little bit different because all the data it relied on up to this point was finalized before the COVID-19 situation.

They say that the economy was strong in February and the economy grew at a decent pace. Jobs continue to be added to payrolls, which has kept unemployment low. Household spending was also on the rise. The investment of businesses and the country’s exports could be better. Meanwhile, inflation isn’t where the Fed would like to see it and there’s particular concern in energy markets given the price war that Saudi Arabia has started over crude oil. However, longer-term inflation expectations haven’t moved much.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

As usual, this is the first paragraph that market participants’ eyes are really drawn to. Setting the adverse effect COVID-19 will undoubtedly have on the economy in the short term, the Federal Reserve chose to lower short-term interest rates by one full point to a range of 0% – 0.25% (emphasis mine). The goal is to try and blunt the impact of the virus in order to support continued economic expansion. They plan to keep the rates this way for as long as COVID-19 is having an effect.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

This is the usual paragraph where the Federal Reserve tells us everything it’s keeping an eye on. What’s different here is the reference to public health as that’s the wildcard in this whole thing, both for domestic and international central banks. It’s something everyone will be paying attention to.

The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.

This is also new and lays out everything the Fed plans to do to support the economy during this crisis. The main thing talked about in this paragraph has a very direct bearing on you if you’re looking for a mortgage at this time. They promised to buy both treasury bonds, and more importantly for homeowners and prospective homeowners, mortgage-backed securities. As more market participants buy the financial instruments that are supported by America’s mortgages, mortgage rates tend to go down because the rate of return on those investments doesn’t have to be as high to get people to buy in. Everything goes back to supply and demand in Econ 101. The Committee also said that it plans to reinvest securities that have matured into more MBS, which should further support a tendency toward lower rates as compared to what would happen if the Fed wasn’t making these purchases.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.

The Federal Reserve was mostly in agreement with this action. Only committee member Loretta Mester felt that the short-term interest rate cut shouldn’t be as high, although she supported every other action taken.

In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements. More information can be found on the Federal Reserve Board’s website.

The Federal Reserve also made several other moves including lowering the rates on discount window lending, which is an important emergency source of cash for lenders during times of crisis. The committee wants lenders to feel good about using this to support consumer borrowing. The other changes we’ll highlight are around the reserve requirements and the change to bank capital and liquidity buffers. Both of these changes mean that people should in theory have access to more funds if they need them because banks are able to loan out more since they don’t need to have as much cash on hand to show stability.

This Post Has 10 Comments

    1. Hi Carmen:

      Essentially, the requirements are that the forbearance has to be complete and you need to bring your existing loan current prior to closing on the refinance. I recommend you speak with one of our Home Loan Experts at (888) 980-6716. Have a good day!

    1. Hi Ferrin,
      With a loan modification, you’re changing the terms of your loan directly through your lender. Modification is typically used in situations where the borrower is at risk of foreclosure. A refinance replaces your existing mortgage with a new mortgage, and allows you to change the term, rate or type of loan. This article may help you better understand the difference. Hope this helps!

  1. You are crooks, you get help from the the federal government, so you can continue paying your over salaried executives., but the middle class person has to pay everything back with interest…

    1. Hi Daniel:

      I understand that you’re frustrated and this is a difficult situation. I want to make clear that we’re doing everything we can to work with government policymakers and regulators to provide the most possible release for our clients. Our clients are central to everything we do here. While we have to follow the relief options that have been given to us at this time by the policymakers and investors we work in tandem with, were constantly making them aware of the impact on the American all manner so that they can make informed decisions about the best relief policy. I’m going to get this to our team to have someone reach out and more fully explain the options that we have to you. Thank you very much!

  2. Why is it that most banks offer to put the next 3 months mortgage payments in the rear of you loan and Rocket Mortgage wants you to pay back the 3 months in full at the end of the 3 months.

    1. Hi Louis:

      I understand your confusion and would like to help clear something up. What you’re referring to is a deferral. Certain banks are able to offer these on the loans that they own directly. However, for the vast majority of banks, this represents a very small percentage of their overall loan volume. Most mortgages originated in the U.S. are sold to one of the major mortgage investors, either Fannie Mae, Freddie Mac, FHA, USDA or VA. We have to follow their policies. In a lot of instances, that means getting a forbearance. It does depend on your loan type, and there are deferrals for certain government loans in some cases, but it depends. There’s another important point you brought up here that I want to address.

      You have the option of paying back the amount due at the end of a forbearance in a lump sum, but you don’t have to. You also have the option of getting on a repayment plan or doing a modification of your loan to make sure that your payment is affordable going forward. We’ll continue to report whatever your payment status was prior to this situation throughout the modification. We’re with you and we understand your concerns. We’re also sharing the feedback we’ve received from homeowners with government regulators, policymakers and investors so they can use that information to inform their decisions around relief options.

      If you would like to apply for assistance with your mortgage payment, you can get started online. Thanks for reaching out!

  3. I borrowed the money for my home via a private individual. I would like to obtain a home mortgage to pay that person back.

    1. Hi Kimberly:

      First, I apologize for missing this comment. One of the options we can help you take a look at is either delayed financing or a cash-out refinance. If you want, you can get started online or give us a call at (888) 980-6716.

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