You'd think the Fed's recent move to cut interest rates would also cut mortgage rates, right? Not necessarily. As this article from Yahoo/CNNMoney.com explains, long-term mortgage rates are mostly tied to the 10-year Treasury yield, not short-term rates as set by the Feds. Did I lose you yet? Basically, the low short-term rate, as set by the Feds, encourages businesses to invest and hire but can also lead to inflation. And mortgage rates are largely tied to the threat of inflation, which means higher threat of inflation, higher long-term rates. The biggest beneficiaries of the short-term rate cut are homeowners with ARM mortgages. ARM mortgages are more closely tied to the short-term rates. To reduce long-term fixed mortgage rates, the Feds must persuade banks to lend more freely again.
Even ARMs are not doing so great now as the Banks are trying to recoup their loses in the selling of high risk, mortgage backed securities. They need to charge more interest on the spread.
