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Politics & MoneyInvestmentsMortgage

It’s official: Fed punts on interest rate hike

What’s next and what it means for housing and mortgage finance

The Federal Reserve said today it is not raising federal funds interest rate this month.

"To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4% target range for the federal funds rate remains appropriate," reads a statement from the Federal Open Market Committee. "In determining how long to maintain this target range, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2% inflation."

The Fed has not raised interest rates since June 2006. For context, that was before the advent of true smart phones and before the existence of Twitter.

There have been three times since 1994 that the markets have faced a rate hike after a lull like the economy has undergone.

The next possible action on interest rates could come with the Oct. 27-28 meeting, and then the Dec. 15-16 meeting.

Voting for the FOMC monetary policy action were: Janet Yellen, Chair; William Dudley, Vice Chairman; Lael Brainard; Charles Evans; Stanley Fischer; Dennis Lockhart; Jerome Powell; Daniel Tarullo; and John C. Williams. Voting against the action was Jeffrey Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

"We continue to expect that rates will trend up over the medium term," says Mike Fratantoni, chief economist at Mortgage Bankers Association. "Mortgages rates, which have been just above 4% recently, are likely to end 2015 closer to 4.3%, and could reach 5% by the end of 2016.

"This increase in rates will lead to a reduction in refinance activity. However, the continued strengthening of the job market will more than offset the gradual increase in rates, and we continue to forecast stronger housing markets in the year ahead,” he said.

 Housing analysts say that if and when the Fed decides to raise interest rates, the subsequent rise in mortgage rates won’t have a noticeable impact on housing.

“The impact on homebuyers will be minimal,” says Selma Hepp, chief economist for Trulia. “For example, an increase of 25 basis points on a mortgage loan of $250,000 raises the mortgage payment by $35. I don’t think that will turn people off from buying a home, but they may end up looking to buy a slightly less expensive home.”

Hepp says, however, the markets’ recent impulsiveness may still result in an initial knee-jerk reaction to any changes in Fed’s policy causing some jump in rates.

“The rates should quickly reverse back to current levels as expectations adjust. In fact, economic uncertainty abroad will help keep the mortgage rates low for an extended time,” Hepp says. “The greater concern is what all of this is going to do to consumer confidence. Consumers are sensitive to topline news stories and may prefer to ride out the volatility for a little while.”

Hepp says she thinks the strong economic fundamentals, including robust job growth, better-paying jobs, rising wages and strong consumer demand will, in fact, increase demand for homes.

“Long term, interest rates may slow home-price appreciation but I don’t think they will have a notable impact on home sales,” Hepp says.

Moody’s Structured Finance Managing Director for Structured Finance Navneet Agarwal says that when a rate hike comes, the effect on mortgage bond investing depends on the shape of the yield curve.

“If the yield curve retains its current upward slope or steepens, the credit quality of pools backing new deals will weaken because the proportion of hybrid adjustable-rate mortgage originations in the loan pools will increase,” Agarwal says. “Borrowers will find hybrid ARM loans more attractive than fixed-rate loans because ARM loans carry lower initial mortgage rates. An ARM loan is typically riskier than a fixed-rate loan because of the potential for payment shock when the ARM loan’s rate adjusts.

“If short-term rates rise without a commensurate increase in long-term rates, flattening the yield curve, then fixed-rate mortgages will become more attractive to borrowers than ARMs because borrowers can lock in the rate. Consequently, the credit quality of the loan pools backing new RMBS will rise,” Agarwal says.

Agarwal added that a modest increase in long-term interest rates will not materially affect the credit performance of legacy outstanding RMBS.

“Although lower prepayments will slow the buildup of credit enhancement and extend the average lives of the bonds, excess spread, credit enhancement and fewer new defaults owing to an improving economy will offset most of the negative impact,” Agarwal says.

Doug Duncan, chief economist with Fannie Mae, says that with the unemployment rate at a low level, just shy of the Fed’s current median projection of the long-run rate, and the expectation that recent market volatility will be temporary, it is unclear what will move the Fed to begin a long process to normalization.

"Prior commentaries about low inflation being transitory were apparently not a motivation for today’s inaction. One thing the Fed has accomplished today is to increase uncertainty around each future meeting date, which does not help foster improvement in the housing market," Duncan says.

Jonathan Smoke, chief economist for, goes a step further than Hepp, saying he thinks a rate hike may actually be good for housing.

“In aggregate I think the near-term impact is negligible if not positive. The number two reason active home shoppers cited why they were in the market for a home this summer was ‘favorable interest rates,’” Smoke says.

Smoke says he believes a rate hike may be the catalyst to get some people who have been waiting for varying reasons to go ahead and take the plunge on a purchase.

“(G)iven how much attention is paid to the Fed’s move, this could very well influence consumers who have been waiting to realize that it only gets less affordable and more challenging from here,” Smoke says.

A new survey conducted this week by Trulia suggests that homebuyers aren’t concerned about a rise in rates.

Trulia surveyed more than 2,000 U.S. adults earlier this week to get their take on rising mortgage rates.

Nearly 69% of Americans said $250,000 is the maximum price that they would be willing to pay to buy their first or next home. At this price point, an increase in rates would not turn people off from buying a home, but it may slightly lower the price range in which they are looking to buy.

“Interestingly, for Americans who are looking to purchase a home this year, mortgage rates are not the primary concern. Prospective homebuyers are most worried about being able to get a mortgage and if they could find a home that they would like,” Hepp says.

Zillow Chief Economist Svenja Gudell tells HousingWire she thinks any impact from a future rate increase will be limited to key markets where housing is already expensive and affordability is already an issue.

“The federal funds rate, and in turn mortgage rates, remain low and will likely end the year roughly where they started it,” Gudell says. “For most markets and buyers around the country, the effects of any eventual interest rate hikes should be pretty small in the near term, but in some unaffordable markets where buyers are already stretching their finances, higher interest payments could more dramatically limit buyers’ options.”

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