The problem with the carrot on a stick approach is that the guy holding the stick is behind the donkey. One jackass behind another, so to speak. My mind's eye conjures up all sorts of potential for disaster.
Since Thanksgiving, short term money (3 month USD) has been much more expensive than the 10 year bond yield. "So what," you ask, "What does that mean?"
It means that banks themselves are afraid to lend to other banks, fearing that undisclosed subprime exposure by the borrowing bank might make it unable to repay the loan on time.
Did you think banks only worried about their mortgage portfolios? Think again. Since the August credit collapse, a bank's biggest boogyman by far is another bank asking for the most normal thing in the banking world--a very short term loan to balance its books.
QUICK TUTORIAL ON THE FEDERAL RESERVE
The Fed publishes two rates, and changes them periodically to influence financial markets, 'a la the donkey and the carrot. It controls the first rate, but not the second.
(1) the Primary Credit rate (discount rate) is set by the Fed, and has been lowered twice since August, in an effort by the Fed to ease the credit crunch. That didn't work. In fact, mortgage rates went UP each time. Oops!
(2) the Fed Funds Target rate (benchmark rate,) is currently 4.50%. This is the rate at which the Fed wants banks to lend to each other. The Fed controls the discount rate. It does not control the benchmark rate. It merely sets it as a target, and market conditions and perceived risk determine the actual rate.
The spread between the two rates is usually 1%.
That's where it was in June of 2006, when the real estate market was a lot rosier.
Right now, it's half of that, as you can see by the chart above.According to economist Lou Crandall, the spread will narrow to .25% after the Fed's December 11th meeting, "The Fed has to re-liquefy the markets to reduce the risk of a financial accident," says Crandall.
I like Crandall. He's a former member of the New York Federal Reserve Bank, which gives him credibility, and he writes clearly. He's easy to understand.
My Opinion: THE SKY IS NOT FALLING.
As a mortgage lender, my main focus right now is reassuring borrowers and their Real Estate agents that the sky is not falling. My main adversary is the tendency toward inaction by both buyers and agents.
"I just can't do anything right now," is what I hear. "Things are too uncertain." One Agent who commented this week on my blog indicated that he's afraid to counsel his client to buy. Fearing that he'll be sued if the market worsens, he's preparing a release form indemnifying him as the agent, should things go south for the buyer after closing! That approach won't do much to bolster the buyer's confidence, so it's not likely to generate much in the way of business. It will drive the buyer away.
My Challenge: SIEZE THE DAY.
Dig deep and find courage. Many have left the businesses of Real Estate and Mortgage Lending. We're still standing because we believe in it, and we've prepared financially to ride out the downturn. Let's educate ourselves on current events and move forward confidently. Expectations have a way of turning into reality. To say it another way...
Outcome rides on intention. And that's the real estate opinion of this Tucson, Arizona mortgage lender,
Mike in Tucson
Content copyright Michael W. Jones
Photo by Shaze2, courtesy FLIKR
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