It's all because banks continue to be reticent to lend money and investors are especially leery of mortgage-backed securities, the market for which has been shattered by hundreds of thousands of defaults during the subprime mortgage collapse. Instead of lending money, banks are using newfound liquidity brought on by rate cuts and Fed term auctions to boost their balance sheets and pay dividends.
That leaves mortgage brokers doubtful that they'll catch a break from today's 75-basis-point cut, which futures trading had suggested would be a full percentage point.
"Anyone who can give you a definitive answer today is going to be guessing" what will happen to mortgage rates, said Alan Rosenbaum, president of GuardHill Financial in New York. "Normally when the Fed reduces 100 basis points you're going to see rates come down immediately. However, in this situation no one is really sure."
The disconnect between the Fed rate and mortgages stems from several factors, including the unwillingness of banks to lend to all but the most qualified lenders.
At the same time, investors have become less interested in buying mortgage-backed bonds issued by federally sponsored lenders Fannie Mae and Freddie Mac . Investors instead have turned to the safe haven of Treasury bonds, despite their lower yields. Banks have been watching the spread between yields of the Fannie and Freddie bonds compared to the Treasurys, which hit record highs last week, for clues as to when mortgage rates will drop.
"Almost more than the mechanical impact is how the market interprets (the rate cut) as a confidence-building issue," said Mike Larson, an analyst at Money & Markets. "In the last couple of days there has been some improvement there. The spread between Freddie Mac and Fannie Mae and Treasurys has narrowed. The question now becomes does that improvement continue."
Mortgage rates have stayed above 6 percent consistently, though they showed a sharp decline Tuesday to 5.74 percent for a 30-year fixed, perhaps in anticipation of the Fed move. Still, banks continue to tighten lending requirements, especially regarding loan to value ratio, making money hard to come by at any rate.
Many lenders have required 15 percent in down payment or equity before lending. Fannie Mae and Freddie Mac, secondary mortgage brokers who buy up initial mortgages, have issued tighter lending requirements to banks.
Investors, though, continue to be wary of the mortgage-backed securities and some analysts say only government intervention in the form of mortgage guarantees will free up the market.
"Many people don't want government intervention, but if they're going to intervene this is the appropriate way for them to do so," Rosenbaum said. "The markets aren't going to trade unless they know they're protected out there."
But Brian Simon, senior vice president at Freedom Mortgage, said he sees some larger lenders such as Wells Fargo and Countrywide already getting ready to roll out lower rates. The question, though, is whether it will last.
Rates have tended to dip immediately after a Fed cut, only to rise again.
"I won't pretend to be a fortune teller of the future. Certainly (the Fed cut) isn't going to hurt," Simon said. "They've made up their mind that they're going to lower the rates in hopes of driving up inflation and that's going to solve a lot of these problems."