“On the Street” talk from Kris Anderson–Santa Rosa Mortgage Broker
August 19th, 2007 . by Mike KellyKris Anderson’s spin on what happened in the credit markets today, Friday, August 17
Maybe you want to hear my interpretation on what and why the Federal Reserve lowered the discount rate today…maybe not. If not, just delete this message.But I feel it is important as a mortgage consultant and planner to let you know what is happening in the credit markets and why it is important.
This has been a wild year! According to website www.ml-implode.com, 128 lenders have gone out of business since the end of 2006. Some of them deserved to close, but others certainly have not. Credit has been pretty easy to obtain since 1998. Each year it has gotten easier and easier to qualify for a loan. How many times have I said, “If you have good credit, I can get you into so much trouble it will make your head spin.” Fortunately I am a little more responsible than that.
Ok, back to what happened today. The Federal Reserve lowered the discount rate from 6.25% to 5.75%. What is the discount rate? It is the rate that the Federal Reserve Bank charges commercial banks, credit unions and other large lenders for borrowing over night. Not only did the rate get lowered, but the Fed also will be allowing the banks to borrow for up to 30 days. I think that the Federal Reserve chose to do this to alleviate the “credit crunch” that has arisen and which forced some lenders out of business and/or to drastically cut back many home loan programs. Even prime loans have been tough to do and sell in this market. Essentially the mortgage “baby” has been thrown out with the bath water.
Yesterday Countrywide Funding had to borrow 11.5 billion from 40 banks to carry them through the next 30 days. Countrywide Funding is the largest lender in the country. If Countrywide closed, it would be incredibly serious. Some say that this lowering of the discount rate was a subtle rescue of Countrywide Funding. Now Countrywide Funding has never been a favorite lender of mine, but they do buy a lot of loans in the secondary market.
The discount rate is not as important as the federal funds rate. The discount rate usually is a full point higher than the fed funds rate. Because it is higher, most banks borrow from each other at the fed funds rate instead of from the Federal Reserve. No brainer…why pay 1% more for overnight funds?
This lowering of the discount rate is intended to loosen up the credit markets so that prime, A paper loans can get made and sold. It is not a rescue plan for the consumer who is stuck in a sub-prime loan or an Alt-A loan that is due to adjust up anywhere from 2% to 6% at the first rate change.
So, let’s talk about why the Federal Reserve did not lower the fed funds rate today. The fed funds rate is used to control the money supply in the economy. Currently the targeted rate is 5.25%. That is the target, but on any given day it can be under or over that limit. This past week it has been as low as 4.75%. Was the Federal Reserve pumping money into the economy to help out the credit markets without a formal ease? Hmmm… Good question!
The Federal Reserve’s primary job is price stability and that is just another way to say “fight inflation.” The Federal Reserve’s goal for inflation is 1% - 2%. Right now inflation is flirting with 2%, but there is a lot of concern that it would not take much for inflation to get worse. The Federal Reserve has not changed the fed funds rate since June of 2006 after 17 -one quarter increments raised it from a low of 1% to the current 5.25%.
The Federal Reserve does not believe that its job is to rescue consumers who bought houses with zero down payments, took interest only loans, option arms or sub-prime mortgages. That is true, however, those loans have been made and the consumer makes up 75% of the economy.
At this time 50% of homeowners in the United States own their house free and clear. Of those who have mortgages, 75% have good-old-fashion prime mortgages and 25% have Alt-A or sub-prime mortgages. Let’s face it…very few of those people have or will default. Most will be successful homeowners.
That is the problem! No one knows how big the problem will be. So there is panic in mortgage land. Today, the banks are being helped with the thought that this will help the consumer in a roundabout way.
Still the Federal Reserve may have to lower the fed funds rate. I said at the beginning of this year that I thought 5.25% was too high and the rate would start a decline in March (OK, I was wrong). If the Federal Reserve does eventually lower the fed funds rate we might see lower interest rates for fixed rate mortgages, but it should help the adjustable rates. The 12 Month Libor Index tends to be ¼% above the fed funds rate and the 12 month MTA tends to be ¼% below.
So, stay tuned! The next Federal Reserve meeting is September 18th. Feel free to call or email me with any thoughts or questions.
Kris Anderson,Senior Loan Consultant,Allstate Mortgage Company
110 Stony Point Road, Ste 110,Santa Rosa, CA 95401,
(707) 521-3434 ext 23
(707) 521-3448 fax
It is my goal to provide you with such extraordinary service that you will gladly refer the people you care most about to me for their home loan needs. Who is the next person you know who may need my assistance for purchasing a new home or refinancing a current home? Don’t keep me a secret
