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The Federal Reserve and your mortgage

The Federal Reserve recently announced that it is going to keep short-term rates low until the end of 2014. This reflects an effort by the Fed to be more transparent with Wall Street as well as the American people

In the past, the Fed has not been so open with their direction, but with the problems that our economy is facing, as well as the austerity problems that are occurring in Greece, Italy and Portugal, they are trying to keep the markets calm and rates low in the hopes of spurring the economy.

What does this have to do with your mortgage? Everything. Weaker economic news and uncertainly in the world will cause investors to sell out of riskier assets such as stocks and into the safety of bonds, which drives down rates. The higher the bond prices are bid up, the lower the rates will go. They have an inverse relationship.

This is why the Fed also buys mortgages bonds and treasury bonds in the open market: To keep rates down. Think about it. If the Fed said that they were going to buy a stock, investors would jump in and start buying it because as soon as the Fed starts buying they will drive up the price, which will allow investors to make money and also keep rates down.

It has worked so far for the Fed, but the real question is this: What will happen to rates when the Fed stops buying and investors start unloading their portfolio of bonds?

About Ron Ricchio

Renato (Ron) Ricchio is president of Chicagoland Home Mortgage. He grew up in Westchester and attended St. Joseph High School and DePaul University, taking a job as a loan officer in the mortgage industry soon after graduating with a bachelor’s in finance in 1991. He started his own company in 2001, which he operates today. He has been ranked in the top 150 loan originators in 2010 and 2011 by Origination News. Ron is happily married with three beautiful children. A board member of San Francesco Di Paola Society and the founder of Ricchio Family Toy Drive for Lurie’s Children’s Hospital, he enjoys cooking and spending time with family and friends.