The Federal Reserve Bank Cut both the discount rate and federal funds rate .75% today in an effort to stimulate this slowing economy. While commodities' prices accelerate, the housing market and subsequent liquidity crisis is dragging the economy into a recession.
We call this phenomenon stagflation and it's REALLY bad for the economy. The Fed has been aggressively cutting interest rates and the declining housing market is closing down mortgage companies, investment banking firms, and real estate brokerages. What more can the Fed do to help?
The Fed can (and will) buy mortgage-backed securities.
Rather than to buy treasury notes in the open market, the Fed will be buying mortgage-backed securities. They will want to get those assets off investment banking firms' balance sheets and provide stability to the MBS market. Remember when I said that only the uneducated pay attention to the treasury note to determine the direction of mortgage rates? Today is proof.
The spread between treasury notes and mortgage-backed securities has been widening these past six weeks. Why? America was considered to be a sub-prime nation; everybody was expected to default on their home loans. Expect the Fed to prop up the MBS market in the next 4-6 weeks. That will be bad for treasury notes and good for MBS.
Remember when I compared this to the junk bond crisis of the early 90's and advised you not to panic? Now is the time to take action. There will be some great opportunities to lock into a low mortgage rates during the rest of this month. If you're closing a loan in less than 14 days, lock your rate. Otherwise, float and see mortgage rates decline a bit.
I am always available for your question at (858)-777-9751. March has been a very busy month for us so I may not be able to answer your questions immediately.
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