Today is “Fed Day,” and the market has already “priced in” or accounted for a 0.25% cut in the Fed Funds Rate (93% chance per the betting markets).
This is a quick reminder, too, that the Fed Funds Rate is only a short-term (overnight) rate that banks charge each other for overnight borrowing, and it does not always influence long-term rates (like mortgage rates).
What the markets are not sure about, though, is whether or not the Fed will stop its “balance sheet runoff.”
The Fed engaged in Quantitative Easing (QE) during COVID, which involved purchasing trillions of dollars in Mortgage-Backed Securities and Treasury Bonds.
This artificial demand from the Fed increased the price of those bonds, which in turn pushed down yields and interest rates overall.
The Fed not only stopped in 2022, but also began “Quantitative Tightening” through “Balance Sheet Runoff”. (Stay with me here; this is important 😊)
Balance sheet runoff simply means that the Fed was allowing maturing bonds to pay off without buying more bonds to replace them.
As a result, the Fed reduced its holdings of bonds from about $8.5 trillion to $6.5 trillion.
TLDR: If the Fed was holding its balance sheet steady (by buying more bonds to replace bonds that pay off), there would be more demand for bonds, and rates would be lower.
Hence, if the Fed announces today that it might stop its balance sheet runoff, rates could fall in response.
Rent-To-Own Is Still a Thing – But There’s a Twist!
We have a “rent-to-own” transaction in our pipeline right now – and there is a fascinating twist.
Renters can accumulate down payment funds if they legitimately pay over-market rent to their landlord.
For example, if the market rent is $5,000 per month, and the renter pays $7,500 for two years – the extra $60,000 will be deemed a legitimate down payment by mortgage lenders.
But here is the twist: Fannie Mae uses current market rents rather than the market rents at the time the lease was signed.
We explained to Fannie Mae that this makes no sense at all, and Fannie Mae said: “Go F yourself! We’re a monopoly and we can do whatever we want.”
We thought that was rude, but we got the message…
