What reasons or scenarios could cause a case where mortgage rates would rise if interest rates(federal funds rate) fall? Is that even possible?
1
-
$\begingroup$ If the future suddenly looks like major recession with a large number of loan defaults, then the central bank might lower interest rates while lenders widen their margins to cover the likely defaults. The latter effect could be larger than the former $\endgroup$– HenryAug 24, 2020 at 9:15
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
1
Your ceteris paribus logic is correct however that not how the real world works. And yes this happened in Canada spring 2020, It's because risk premiums went up. We could imagine that if the bank had inflation expectations they would want a real ROI > 0 and thus those could move in opposite directions
-
$\begingroup$ The basic premise of this answer is good. However, the spread on mortgages has very little do with a bank wanting a “real ROI”. Banks are levered financial entities, and their concern is getting an adequate risk/default adjusted spread over their cost of funding. In the US, pricing for conventional mortgages is largely determined by residential mortgage-backed security pricing. $\endgroup$ Aug 23, 2020 at 21:36