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The Fed. interest rate cut-how is this going to play out?

By
Industry Observer with Responsive Pest Control

I think the Federal Reserve surprised a lot of us yesterday with the 1/2 point rate cut they chose.  I, for one, thought they might trim the rate by 1/4%.  Obviously, the Federal Reserve is concerned about how the mortgage crisis has affected the overall economy.  And this is a good start.  As we go forward, it's likely the Fed. will reduce rates again.  Possibly with another 1/4 point cut at their next meeting in October followed by a  1/4 point cut by the end of the year.

The good news is for you borrowers who have adjustable rate loans.  For example, if you have a home equity line of credit currently at 8 1/4%, your rate will go to 7 3/4%.  If you have a credit card, the rate will probably go down. And if your home loan is on an adjustable rate, your rate will go down when it is eligible.

This does not mean we're out of the woods yet with all the changes in our industry.  I know.  Some of you may be tired of my somewhat bearish approach to things but I think it's important to be realistic.  Number one, home loan rates are pretty good right now (currently at or near 6% on a 30 year fixed mortgage) so I don't expect to see a lot of improvement.  Two, a refinance boom probably won't happen anytime soon.  The candidates most likely to refinance at this point are the borrowers with adjustable rate mortgages.  Unfortunately, quite a few borrowers probably won't be able to refinance when the time comes.  As we all know, credit has been tightened severely and, with a myriad of mortgages set to adjust through June 2008, I don't see the lenders loosening the pursestrings in the near future. Also, keep in mind that adjustable rate mortgages are typically fixed for the first couple of years at a minimum so any Fed. rate cut doesn't help now.  It will only help when the rate adjusts.

So again, I urge caution in thinking this is the panacea we've all been waiting for.  We need to ride this one out a little longer. Remember this is a long-term game.  Eventually things will improve and real estate will boom again.  In the meantime, keep plugging.  That's all you can do. Have a great day!

 

Paul

 

 

Posted by

Paul McFadden

Endea Thibodeaux
Lanham, MD
Solar Energy Consultant, CDPE, CLHMS
Not out of the woods yet?  What does this mean for slow markets and areas where there are alot of foreclosures?  It seems like they need to reduce again just like they did yesterday. At least until the economy gets better.
Sep 19, 2007 05:02 AM
Allen C. Wright
RealtyU - Aliso Viejo, CA
NS, AHS, REPS

Paul,

It will help some, but it does little for the person that took a 1.95% teaser that has adjusted close to double-digits ... I am not advocating any bailout, but it would be in the industries best interest (both lending and real estate) to push for term adjustments on loans that are going into foreclosure. 

Again, not a bailout, but a chance for those that just cannot make it to re-adjust their loan to better fit their financial position.

I always ask myself, why hasn't NAR stepped up to the plate with some relief?  $99 per year from 1.4 million agents and they cannot do something ... what a great PR campaign.

Sep 19, 2007 05:14 AM
Paul McFadden
Responsive Pest Control - Seattle, WA
Pest Control, Seattle, WA.

Thanks, Allen, for your comments.  Those are great thoughts you have.  Yes, you would think certain and various groups would get involved.  it remains to be seen if they actually will though.  FHA secure (the new bill signed by President Bush) may help borrowers who can't make a new payment due to the adjustment.  We'll see how much that helps.  Take care.

 

Paul

 

Hi Endea:  I'm not sure people who are in trouble or areas that are hard-hit will see much relief.  Capitalism is oftentimes a boom or bust mentality.  I believe we still have a way to go before we see good times again in our industry.

 

Paul

Sep 19, 2007 06:29 AM