The Fed takes new approach to inflation: What it means for your savings, credit-card interest — and mortgage rate

The Federal Reserve is shaking things up — which is both good and bad news for consumers.

The Fed made some of the biggest changes to its policy in years following an extended review. The central bank has revised its approach to inflation and the labor market in a move that could usher in an extended period of low interest rates.

But the new approach won’t mean that consumers will save money across the board. “The Federal Reserve’s new strategy could divide the landscape for the various financial products important to consumers,” said Lynn Reaser, chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University.

Here’s how the Fed’s new policy will affect Americans’ finances:

What did the Fed change?

The Fed is now officially less concerned about high inflation. Moving forward, central bankers will target inflation that averages 2% over time. This means that following a stretch with low inflation, the Fed might allow inflation to run above 2% for a period of time.

Along these lines, the Fed will concern itself less with the strength of the labor market. “A tight labor market is no longer correlated to inflation,” said Dan Geller, a behavioral economist and founder of consulting firm Analyticom.

In the past, the Fed’s official view was that a strong labor market could cause inflation to jump — as a result, the central bank would move to raise rates even if higher levels of inflation had yet to materialize when the job market was especially strong.

The new policy will allow the Fed to keep rates low even if the job market rebounds and inflation picks up. As a result, some have suggested that it may be many, many years before the central bank hikes rates again.

Americans will save on credit-card interest because of the Fed’s new policy

The good news for any Americans with credit cards is that the annual percentage rate on your cards should go down — or remain low — for the foreseeable future.

“Card APRs are still high, but they’re actually the lowest they’ve been in years, largely thanks to the Fed,” said Matt Schulz, chief credit analyst at LendingTree
“Their latest announcement means that rates are likely to stay at low levels for some time.”

The same is true for other forms of shorter-term debt, including home equity lines of credit and some personal loans. On short-term loans like these, the bulk of the movement in interest rates is tied to changes in the federal funds rate, which is the interest rate commercial banks used to borrow or lend reserves to each other.

The federal funds rate is the benchmark for these forms of debt. Earlier this year the Fed cut the federal funds rate twice, prompting a drop in interest rates on many forms of consumer debt.

“The Fed isn’t the only factor that affects credit card interest rates, but in recent years, it has definitely been the biggest one,” Schulz said. “The truth is that for most of the last decade, credit card APRs haven’t moved all that much, except for when the Fed raised or lowered rates.”

In the case of credit cards, a lower rate doesn’t necessarily mean an affordable one though. The average credit card APR currently stands at 16.03%, well above the rates seen for other loan products like mortgages or auto loans. That is down from 17.68% a year ago, said industry analyst Ted Rossman, but it only amounts to $8 a month in savings for someone making minimum payments toward the average credit card debt (which is $5,700 according to the Fed.)

“This is why credit card debtors shouldn’t expect the Fed to ride to their rescue,” Rossman said. “It’s really important to pay down credit card debt as soon as possible, since rates are so high.”

Your savings account may not generate as much income in the future

The interest earned via high-yield savings accounts and certificates of deposit is dependent on the Fed’s interest rate policy. As such, these savings vehicles won’t generate major amounts of interest income so long as the Fed maintains its low rate stance amid low inflation.

If inflation picks up though, banks could move the interest on these accounts higher though, Geller said.

Mortgage rates could actually rise even if the Fed keeps rates low

“Long-term interest rates will be much less affected by this policy change,” Reaser said. And that includes mortgage rates.

Mortgage rates don’t respond directly to moves on the Fed’s part because the Fed only controls short-term interest rates. Instead, the rates on mortgages ebb and flow in response to movements in the long-term bond market, particularly the yield on the 10-year Treasury note

. Therefore, mortgage rates are more subject to the whims of bond investors.

“If investors fear that the Federal Reserve might be too late in responding to any buildup in inflation pressures, long-term rates could be higher,” Reaser said. This logic doesn’t just apply to 30- and 15-year mortgages though, but also to longer-term personal loans and student loans.

The Fed can take certain actions that would keep mortgage rates down though.

“The Fed being more accommodative might mean that they are purchasing more mortgage-backed securities and treasuries which could counter the inflationary effect on the longer rates for things like mortgages,” said Tendayi Kapfidze, chief economist at LendingTree.

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The mistakes to avoid when moving to a state with lower taxes and why low mortgage rates are a double-edged sword

Hi, MarketWatchers. Don’t miss these top stories:

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Thinking about moving to a state with lower taxes? These are the mistakes to avoid

Some states are great to live in, but not so great to die in.

32 states have been approved to offer $300 extra in unemployment benefits — only 4 have started to distribute it

An executive order President Donald Trump signed Aug. 8 calls for distributing an additional $300 in weekly unemployment benefits from a $44 billion fund set aside for disaster relief.

My sister-in-law moved in with her mother, changed her will and inherited everything. Is it too late to claim what belongs to us?

‘She is a compulsive liar and has not been honest about anything concerning the trust. There is talk about elder abuse.’

Sweden embraced herd immunity, while the U.K. abandoned the idea — so why do they BOTH have high COVID-19 fatality rates?

‘Sweden’s prized herd immunity is nowhere in sight,’ according to the Journal of the Royal Society of Medicine.

Google searches for ‘panic attack,’ ‘anxiety attack’ hit all-time high during coronavirus pandemic

Queries appeared to surge in response to social distancing orders and early pandemic milestones.

‘We can get through this’: How to manage your mental health during the COVID-19 pandemic

Salesforce CEO Marc Benioff revealed this week that about one-third of the company’s employees had reported experiencing a mental-health issue.

‘A toxic scandal’: Ireland becomes a test case on how NOT to battle COVID-19

Ireland’s EU Commissioner for Trade resigned late Wednesday after reports alleging that he did not abide by the rules of his 14-day quarantine period, in addition to attending an 81-person dinner, also directly contravening government guidelines

Mortgage rates fall once again — but rising home prices mean that buyers shouldn’t expect savings

Even with interest rates at record lows, someone buying the typical home today will have a larger monthly mortgage payment than they would have if they bought a year ago.

Pending home sales rise in July, but inventory challenges could limit the housing sector

Compared with a year ago, contract signings were up 15.5%.

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Fed adopts new strategy to allow higher inflation and welcome strong labor markets

The Federal Reserve’s interest-rate committee on Thursday announced it has unanimously approved a new strategy seen as leading to an easier monetary policy stance.

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Moderna and Pfizer’s COVID-19 vaccine candidates require ultra-low temperatures, raising questions about storage, distribution

The COVID-19 vaccine candidates being developed by Moderna Inc. and BioNTech and Pfizer Inc. will require stringent standards for refrigeration, and that may hamper how they are distributed to the hundreds of millions of Americans expecting to receive them.

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Mortgage Rate Decline Slowed By New Fee Charged By Fannie Mae And Freddie Mac

The interest rate on mortgages has not fallen as much as the interest rate on 10-year Treasury bonds


Mortgage refinance costs swung up due to a new fee, which some are calling a tax. The eventual path to lower rates (which I recently predicted) will be slowed, but not entirely stopped. The announcements by Fannie Mae and Freddie Mac say the lump-sum fee of one-half a percent of the loan balance applies to refinances on single family homes. It does not apply to construction loans converting to permanent loans nor to mortgages for home purchase.

Fannie and Freddie are government-sponsored enterprises, which is a little confusing in itself. They are enterprises, meaning they have profit and loss statements. But they are government-sponsored, so their debt is treated kind-of-like government debt. They can pay lower interest rates than private companies would have to pay. With that advantage, they have near-total control of the market for mortgages that conform to their guidelines.

Interest rates on 30-year mortgages usually run at a steady premium over the interest rates on 10-year Treasury bonds. But early in 2020, the Treasury rate plummeted without mortgage rates following along fully. This wider margin was explored in William Emmons’ article, “Why Haven’t Mortgage Rates Fallen Further.” Most mortgages that conform to Fannie and Freddie’s loan guidelines are bundled in groups and sold as mortgage-backed securities. The process creates two spreads. At the retail level, the interest rate charged to borrowers is higher than the interest rate paid to owners of the mortgage-backed securities. The mortgage originator – a bank or independent mortgage company – pockets the difference to cover their costs and to earn a profit. The second spread is called the wholesale margin: the difference between the interest rate earned on mortgage-backed securities and what government bonds are paying.

Diagram of the mortgage process from origination through securitization

The mortgage process from origination through securitization

Emmons’ analysis of data from the spring of 2020 found that most of the wider margin of retail mortgage rates over treasury bond yields was due to retail spread. Emmons confirmed to me by email that more recent data continue that pattern. Basically, the company that the homeowner goes to for a refi is pocketing higher revenue. A portion of the higher revenue covers higher costs of operating during the pandemic, but most of the revenue flows through to profits.

The new fee is Fannie’s and Freddie’s attempt to capture some of the profits to build up their reserves. The immediate effect was that mortgage rates jumped up, perhaps out of anger or irritation by mortgage processors.

To determine the effect of the fee on the mortgage rate that a typical refi customer is quoted, we begin with basic supply and demand. In a typical textbook example, an increase in costs through a tax or necessary fee is usually passed through, partially, to customers. Some of the tax cannot be passed through, so it lowers the seller’s profit.

However, this would not be the case if capacity was limited. Sometimes a seller cannot expand supply, at least not as fast a demand is growing. That is the situation now. The demand for refis grew hugely when interest rates dropped, and the mortgage industry could not expand fast enough. Mortgage companies and banks could have turned customers away, but instead they raised their profit margin.

In such a case, the tax would be borne entirely by the sellers and not at all by the consumers. If the mortgage companies bumped up their rates to cover the cost of the new fee, some customers would decide not to refinance. Mortgage companies would have unused capacity, and some would cut rates to bring customers back in. Competition among sellers would bring the price back down.

So at a point in time, this fee appears to be bad news just for mortgage industry profits and not for homeowners looking to refinance their mortgage.

However, the industry’s capacity constraint is not fixed. Indeed, the industry has been expanding as fast as it could to serve the millions of people looking to refi. The new fee will lower profits, so the mortgage industry will expand less rapidly. That will slow the decline in mortgage spreads. And spreads will never return to the lows they had previously seen, because of the higher cost. So the fee looks benign for a day or two, but not afterwards.

Mortgage rates will continue to decline from the current level, but not as fast, nor as far, as would have happened if Fannie and Freddie not chosen to add this fee.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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ICE borrows $6.5 billion to expand its mortgage industry footprint

A house for sale in Pittsburgh

Associated Press

Intercontinental Exchange Inc., the owner of the New York Stock Exchange, borrowed $6.5 billion on Monday in the corporate bond market to help expand its footprint in the U.S. mortgage industry.

That’s more than half the $11 billion that ICE
a global exchange, clearinghouse and data provider, agreed to pay for cloud-based mortgage platform provider Ellie Mae, in a cash and stock deal announced earlier this month.

ICE had no comment for this article, but said the addition of Ellie Mae to its platform helps establishes it “as the leading provider of end-to-end electronic workflow solutions serving the evolving U.S. residential mortgage industry,” in a statement earlier this month announcing its deal to buy Ellie Mae.

The 2007-’08 global financial crisis exposed major weaknesses in the mortgage underwriting and servicing industries, which resulted in states’ attorneys general, including Kamala Harris, Joe Biden’s pick as vice president, extracting $25 billion in foreclosure fines from major U.S. lenders.

Related: Democrats to open convention like no other as Biden’s big party goes virtual

While Ellie Mae doesn’t make mortgage loans itself, it is among a number of platforms looking to bring more of the estimated $11.2 trillion residential-mortgage finance market into the digital era.

Despite the pandemic and its economic shocks, the Federal Reserve’s unprecedented efforts to keep credit affordable and flowing during the crisis are expected to help push U.S. home loan originations to $3.1 trillion this year, a new post-2008 record, according to Goldman Sachs analysts.

It has also rarely been a better time for U.S. businesses to borrow in the booming U.S. corporate bond market, which last month saw yields on the closely watched ICE BofA US Corporate Index fall below 2% for the first time in history. 

Read: A binge? Bulge? Or just the new normal for debt in America as Fed helps spur string of records

Pricing on the five-part ICE bond deal reflects the continuing hunt for yield among investors since March, when the Fed unleashed its raft of emergency lending and bond-buying programs to keep credit from drying up.

Specifically, the longest, a 40-year parcel of ICE bonds, cleared the market at a spread of 160 basis points above a risk-free benchmark to yield 3.04%, according to a person with direct knowledge of the dealings.

Price levels initially circulated in the area of 180 basis points by bankers looking to drum up interest in the debt offering, which was rated A3 by Moody’s Investors Service and BBB+ by S&P Global.

Most U.S. corporate bonds are priced at a “spread” above U.S. Treasurys
with the spread being how much an investor is paid above a benchmark to own bonds.

Low bond yields have been credited with lifting major U.S. stock indexes back near their all-time highs, roughly 100 days since the onset of the coronavirus in the U.S. sent equities into one of the sharpest downward spirals in memory. The Dow Jones Industrial Average

ended Monday’s session about 5.8% off its record high in February.

ICE said it plans to raise $9.25 billion in cash, including Monday’s debt raise, as well as $1.75 billion in equity through the sale of new shares of ICE common stock to buy Ellie Mae, in publicly filed deal documents.

Although mergers and acquisitions took a “nosedive” in the first quarter, a team of analysts led by Ken Johnson at Wells Fargo Investment Institute said they think volumes, particularly in “automation and data analytics,” could be poised for a pickup, in part because U.S. public companies reported more than $2.5 trillion of cash on hand during the second quarter.

Read: Coronavirus slashes deal-making globally: What to expect next

“The hard-hit brick-and-mortar retail and travel-and-leisure industries
also could present attractive M&A opportunities as they carve out and sell
businesses in an effort to repair balance sheets and improve liquidity,” Johnson’s team wrote in a note Monday.

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Refinancing your mortgage will cost more thanks to a new fee from Fannie Mae and Freddie Mac

If you’re in the process of refinancing your mortgage, you may end up paying more than you expected.

Fannie Mae

and Freddie Mac

said Wednesday that they will start charging a 0.5% “adverse market fee” on all refinances, including both cash-out and non-cash-out refis. The new fee goes into effect Sept. 1.

“As a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty, we are introducing a new Market Condition Credit Fee in Price,” Freddie Mac said in a notice to lenders.

Fannie Mae noted that its forecasts regarding the impact of COVID-19 could change substantially, making it difficult to predict the pandemic’s impact on the government-sponsored enterprise.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, said the two government-sponsored enterprises “requested, and were granted, permission from FHFA to place an adverse market fee on mortgage refinance acquisitions.”

Fannie and Freddie are not lenders themselves — instead, they purchase loans from lenders, package them into mortgage-backed securities and then sell those securities to investors. Fannie and Freddie also provide guarantees to investors and advance payments even when borrowers are delinquent on the loans.

Also see:Mortgage rates keep falling — so will they finally drop to 0%?

The new fee could add up to a significant sum in many cases. The median home nationwide was worth $291,300 as of the second quarter, according to the National Association of Realtors. Therefore, if you applied this fee to a mortgage on a home worth that much, assuming a 20% down payment, the fee would cost over $1,100. The Mortgage Bankers Association, a trade group that represents lenders, said the fee would amount to around $1,400 per loan on average.

It’s not the first time Fannie and Freddie have imposed a fee like this. In 2007, Fannie Mae imposed a 0.25% surcharge on all mortgages it bought from lenders in response to the burgeoning global financial crisis.

‘If you had a refi pending and didn’t lock or were just thinking about a refi and hadn’t acted yet, then the consumer pays thousands of dollars as long as this stays in effect.’

— Bob Broeksmit, president and CEO of the Mortgage Bankers Association

The new fee quickly faced criticism. A group of 20 trade organizations and public interest groups called on the FHFA to reverse the fee. The group included the American Bankers Association, the Credit Union National Association, the Mortgage Bankers Association, the National Association of Realtors, the Center for Responsible Lending and the National Fair Housing Alliance.

The group argued that the new fee conflicts with the Trump Administration’s actions urging federal agencies to support homeowners. “At a time when the Federal Reserve is purchasing $40 billion in agency mortgage-backed securities per month to help reduce the cost of buying or refinancing a home and stimulate the broader economy, this action by the GSEs raises those costs, contradicting and undermining Fed policy,” the group said in the statement.

A senior White House official told The Wall Street Journal that the Trump administration “has serious concerns with this action” and would review the fee.

Others pointed out inconsistencies in the timing and structure of the fee. NerdWallet home and mortgage expert Holden Lewis said it was “odd that they’re not charging the fee on purchase mortgages, too” if the fee was being implemented because of economic uncertainty.

“It doesn’t make sense,” Bob Broeksmit, president and CEO of the Mortgage Bankers Association, told MarketWatch. “The implementation timeline is intentionally punitive and absurd.”

As of June, it took 48 days on average to close a refinance loan, according to mortgage technology firm Ellie Mae. Therefore, lenders will have many loans already in the pipeline where borrowers have already locked in a rate and are just waiting to finalize the loan.

If lenders cannot complete those loans by Sept. 1, they will be forced to pay the fee. However, if a borrower had not yet locked in a rate with their lender, the cost of the new fee would be passed on to them in most cases. (Fannie Mae noted that whether the fee is passed on to the consumer is up to the lender.)

“If you had a refi pending and didn’t lock or were just thinking about a refi and hadn’t acted yet, then the consumer pays thousands of dollars as long as this stays in effect,” Broeksmit said.

Broeksmit also called into question the necessity of the fee. Millions of borrowers nationwide have requested forbearance on their mortgages since the pandemic began, but that number has been falling in recent weeks.

And roughly a quarter of the people who entered a forbearance agreement, which means they could skip their monthly payments, did make their July payment, Broeksmit said. Furthermore, borrowers applying for a refinance need to be current on their mortgage in the first place, making those loans arguably less risky. Many lenders have also implemented stricter requirements for borrowers to qualify for a mortgage.

The new fee threatens to make refinancing a less lucrative proposition for homeowners who have yet to lock in the market’s rock-bottom rates. Refinance volume has been elevated in recent months because of the low mortgage rate environment. Since March, mortgage rates have dropped to record lows on eight separate occasions.

But borrowers applying now won’t be as lucky. “By this artificial increase, it requires a larger drop in rates for it to be worthwhile for borrowers to refinance,” Broeksmit said.

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