Did you know that the Federal Reserve is not the only entity responsible for setting the interest rates of our nation’s federally-sponsored mortgages? In fact, it is likely that other government agencies and entities, such as the Internal Revenue Service, also play a role in determining our nation’s mortgage rates. Since the federal government ultimately dictates the mortgage rate, it stands to reason that many factors go into setting those rates. These factors may include, among others, inflation, unemployment rates, consumer sentiment, and changes in the government’s lending policies.
The Federal Reserve, by the way, is simply one of many Central Banks that are responsible for determining interest rates on behalf of the U.S. Department of the Treasury. If you think that you may have heard the term “Central Bank”, this probably means that you have a certain bank or financial group that influences mortgage rates. For example, the Fed funds the banking system, acting as an unofficial central bank for the financing of our nation’s mortgage industry. Other Central Banks also plays a role in determining mortgage rates.
Why are we discussing the role of the Federal Reserve? Let’s put it this way: The entire purpose of the federal government is to protect the financial stability of our economy. In other words, our government has an interest in making sure that inflation is kept to a level which is acceptable to the overall population of our nation. As such, it would be absurd for our federal government to continue to allow mortgage rates to rise unabated. After all, increased interest rates can seriously harm our economy. To make matters worse, our government is currently negotiating with our foreign creditors to obtain better interest rates for the financing of our nation’s deficits.
It should be quite obvious that increased interest rates on mortgages do not help the economy whatsoever. Indeed, this is precisely why interest rates are normally decided by the Federal Reserve. The Federal Reserve usually acts in the best interest of the economy whenever it opts to lower interest rates. If the federal government were to start raising interest rates, it would spell disaster for our country’s economy.
What would happen if we did that? First of all, our consumer-driven economy would suffer a great loss. Right now, our consumers, savers, and investors are the primary force behind our economy. If all of them were suddenly affected by increases in interest rates, there would be a great recession before you even finished reading this article.
In addition, increasing interest rates would mean increased taxes for Americans. Without exception, any serious person would not want to start replacing their savings or investments with more debt just because the federal government decided to raise interest rates. In fact, the very idea of increasing taxes for private individuals with good credit is anathema to the American people. So naturally, people with great credit end up saving their money in a different form, most often in bonds, because bonds are basically interest-sensitive assets.
Not only is the Federal Reserve hurting the economy with its actions, but it is also causing a great deal of damage to the housing industry, which in turn hurts the American economy. Right now, real estate is considered a safe haven investment, because most mortgage loans come from the FHA (Federal Housing Administration). But the recent decision by the FHA to reduce or eliminate FHA insured mortgages has put tens of thousands of homeowners out of work, further impacting the economy. So you ask: “What’s really going on here?” And the answer may surprise you.
In fact, the main problem isn’t the Federal Reserve or Fannie Mae, although both play a role. The problem is the ever-increasing amount of leverage being used by lenders when they refinance millions of homes at once. As a result, mortgage interest rates have been rising, which is not healthy for the economy. This is something that no one wants to hear, but the truth is that interest rates must be kept very low to prevent inflation from destroying the economy.