The Federal Reserve to the rescue! September 18, 2007
The Federal Reserve slashed 50 basis points off both the federal funds rate -- the rate banks charge each other for overnight loans, down to 4.75% -- and the discount rate, the rate the Fed charges for direct loans to banks was reduced to 5.25%. This marked the first time the Fed had cut the overnight rate since June 25, 2003.
What does this mean? Inflation appears to be less of a factor and the focus now appears to be aimed at limiting the prospects of a recession. Lowering these key interest rates will encourage economic activity by making funds more available, thus encouraging economic growth.
The size of the cut was anticipated to be .25%, however a .5% cut was considered to be drastic as it indicates the Feds concerns about potential adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
What does this mean for the mortgage market and you?
That being said, what is the effect on mortgage rates? The market has been anticipating a .25% drop and priced it into mortgage interest rates recently. An interesting point here is that lenders wake up, look at what is happening on the East Coast bond market opening and provide rate sheets based upon where the market is going. During the day good or bad news affects the bond market, sometimes drastically. During the day, whenever changes in the market dictate a change in interest rates there is a mid-day correction.
Today’s unexpectedly large rate cuts translated into about .125% lower interest rates from where the market opened to after the Fed’s announcement.
That is an improvement of .447% in cost of your mortgage, or $447 per $100,000. On our $300,000 loan that is $1,341 less expensive for the borrower. Bad news on the bond market will cost you these amounts rather than benefit you.
Expect a Bernanke bounce in stock markets around the world tomorrow. It is like the world is holding its breath to see what the Fed did today, and they will like it. The next question will be did the Fed do the right thing?
Over time, what we will be looking at will be the cumulative effect. More rate cuts will eventually translate into lower interest rates. Lower interest rates mean that buyers will begin to feel confident again and demand on housing will increase.
NEWS FLASH: Fannie Mae (Freddie Mac already has this mandate in place) has just been authorized to increase it’s portfolio by 2% per year. Since both own or guarantee 40% of US home loans, does this mean that, in order to increase their portfolio you should expect an increase in loan limits? I think that is in the offing, question is when. More later.
Now might be a great time to be a home buyer as prices may have softened and will allow for instant profits
based upon seller requirements to sell in order to get on with their lives.
Billions in sub prime ARM's will be subject to higher payments.
It’s sad, a buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, the bill would now be set to spike to $1,331, a 39 percent increase. Mortgage Meltdown