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Why Fed Rate Cuts Won't help you

March 18th, 2008 3:09 PM

Why the Fed's rate cuts won't help you

The Federal Reserve today continued its attempt to get out in front of the worst financial crisis to hit the world banking system in five decades by slashing short-term interest rates by three-quarters of a percentage point, to 2.25%, the lowest level since 2004.

But the Fed's effort will have little effect on the ability of the average American to get a cheap loan for a new home, car or college education even as it has a large effect on U.S. banks' ability to fix their balance sheets by racking up fat profits.

If that sounds unfair, welcome to the latest episode of a brutal new American business ethic, in which the government bails out bad bets by risk-taking banking executives in New York with money that it borrows from middle-class families and foreign investors. The effort is gilded with fancy financial language and cloaked in the guise of a rescue that helps all citizens, but the reality is that Washington is essentially robbing the poor to help the rich.

It seems odd, but these are extraordinary times. Normally, when the Federal Reserve cuts the rate at which it lends money to U.S. banks, those banks in turn cut the rates at which they lend money to citizens and companies for personal and commercial use. Simple enough. Yet in the past few months, banks have made three important changes in their usual practice:

They have not been passing all of their interest-rate savings to customers.

They have restricted lending only to most creditworthy, documented applicants.

They have cut the total amount they're willing to lend.

Good for banks, bad for you

Banks are taking these seemingly perverse steps in an effort to reverse the effects of the massive losses they have withstood for lending too broadly to consumers and companies with lousy credit over the past five years.

They're pulling a big 180, which is as confusing as it is disheartening. Rather than providing funds to prospective home buyers and business people with legitimate needs for moving into larger homes or expanding factory lines, records show the banks are hoarding the low-cost money they're borrowing from the Fed and investing it in Treasury bonds paying higher interest yields. They're then pocketing the windfall profits to repair their own ravaged balance sheets.

As if that's not bad enough, the Fed's swiftly conceived, unprecedented course of action harms the public in three other ways:

It boosts inflation by lifting the total number of dollars in circulation.

It undercuts the attractiveness of the U.S. dollar, which leads to higher food, energy and gold prices.

It cuts the yields of dividend-paying investments such as government bonds upon which retirees depend for steady income.

In other words, the Fed action helps imprudent bankers dig out of a hole by putting prudent citizens and foreigners in one. This gives big financial businesses a shot at staving off disaster at the risk of cutting the spending and earning power of everyone else

Posted by Jeff Sarkisian on March 18th, 2008 3:09 PMPost a Comment (0)

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COMING REDUCED JUMBO RATES/ EXPANDED CONFORMING LOAN LIMITS. Mortgage Rate Stimulation Package

January 29th, 2008 2:57 PM

House leaders have struck a deal with the White House to increase Fannie Mae and Freddie Mac loan limits from $417,000 to a maximum of $730,000 during negotiations on a $150 billion economic stimulus package. The stimulus package, which Congress is expected to pass in a few weeks, also increases the Federal Housing Administration loan limit permanently. This increase reflects an agreement between the House and Senate banking committee chairmen to increase the FHA and GSE loan limits to 125% of median area home prices, with a $730,000 cap.Treasury Secretary Henry Paulson

Posted by Jeff Sarkisian on January 29th, 2008 2:57 PMPost a Comment (0)

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2008 CONFORMING LOAN LIMIT $417,000

January 18th, 2008 5:06 PM

2008 CONFORMING LOAN LIMIT $417,000

Washington, DC - Office of Federal Housing Enterprise Oversight Director James B. Lockhart today announced the maximum 2008 conforming loan limit for single-family mortgages purchased by Fannie Mae and Freddie Mac (the Enterprises) will remain at the 2007 level of $417,000 for one-unit properties for most of the U.S. Higher limits apply to Alaska, Hawaii, Guam and the U.S. Virgin Islands as well as to properties with more than one unit. The conforming loan limit determines the maximum size of a mortgage that an Enterprise can buy or guarantee. By law the maximum conforming loan limit is based on the October-to-October change in the average house price in the Monthly Interest Rate Survey (MIRS) of the Federal Housing Finance Board (FHFB). The FHFB reported the decline in the average price was $10,685 or 3.49 percent, from $306,258 in October 2006 to $295,573 in October 2007. The combined two-year decline is now 3.65 percent. “While the house price survey data used in determining the conforming loan limit show a decline over the past year, as previously announced and consistent with the proposed new conforming loan limit guidance, the level will remain at $417,000 for the third straight year,” said Lockhart. On October 22, 2007 OFHEO published in the Federal Register a revised Examination Guidance proposal for procedures relating to the calculation of the conforming loan limit and implementation of increases or decreases in the limit. OFHEO published the initial proposal for comment on June 20, 2007. The second comment period has now closed and OFHEO is reviewing comments received. At the time of the October publication, OFHEO announced that no decreases in the loan limit would be required for 2008, regardless of the price data in the MIRS report. OFHEO assumed responsibility for establishing the conforming loan limit with a February 2004 guidance . The conforming loan limit is based on the FHFB monthly survey and not OFHEO’s quarterly House Price Index (HPI), which will be released for the third quarter on November 29.

Posted by Jeff Sarkisian on January 18th, 2008 5:06 PMPost a Comment (0)

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Whats happening with Mortgages and The Fed Rate Cut week of dec 18th

December 17th, 2007 5:37 PM

Fed Rate Cut

The two big news stories of last week were probably the Fed’s rate cut and a hike in consumer prices. Last Tuesday, the Fed decided to cut the Fed Fund rate by a quarter percent, bringing it down to 4.25 and the discount rate to 4.75%. On Friday, consumer prices reported a .8% increase, beating economist expectations of .6%. Even core inflation, which doesn’t include food and energy prices, rose .3% which is the biggest rise in the last ten months. But there is some good news, too, as the Commerce department reported a 1.2% hike in retail sales in November, beating analysts’ expectations of .6%.

Mortgage Update

Last week the mortgage market got its share of good news. The National Association of Realtors’ index of pending existing home sales rose 0.6% in October. According to the Mortgage Bankers Association, mortgage applications rose during the week ending December 7 by 2.5%, to 811.8. The purchasing index rose 1.7% to 472.0 and refinancing increased 4.3% to 2,879.8. The Fed’s rate cut will give some relief to borrowers with Home Equity Lines of Credit (HELOCs) as the Prime Rate fell in tandem, by 0.25%. Treasury based ARMs holders will also find their new adjusting rates improving in the future; but LIBOR based ARMs borrowers may not be quite as fortunate, as the Fed’s Rate doesn’t have a direct relationship with the LIBOR.

Government Initiatives.

Better late than never. Finally, the Government has started taking some initiatives to bail out the mortgage market from its current crisis. First, President Bush came up with a Rate Freeze Plan; then the Senate approved legislation that will allow the Federal Housing Administration (FHA) to support delinquent borrowers in refinancing their loans which are resetting at higher rates. The Bill also increased the maximum mortgage limit of the FHA to the same as Fannie Mae and Freddie Mac and lowered the down payment fees requirement to 1.5 % from 3% in some conditions. The Federal Reserve also came up with a new weapon called, "Term Auction facility" (TAF). Under TAF, it will auction term funds to depository institutions. This will help mortgage lenders borrow much needed money at lower costs -- especially those who want to originate jumbo mortgages for portfolio, as it will serve to reduce the loan cost. Depository institutions in Europe, Switzerland, Canada and England can also bid on the TAF. The effect of this should, in theory, exert downward pressure on the Libor Index too.. The Federal Reserve will offer $20 billion in its first auction on December 17, 2007.

Stocks Market Update

On the corporate front, major banks were busy with the preparation of "closing the books." UBS announced a $10 billion write-down on credit and mortgage related securities Citigroup planned to move $49 billion of assets from their structured investment vehicles to its balance sheet. Investors were successful in reacting to the mixed data, as major indices like the S&P500 and the NASDAQ ended the week with a slight decline.

Coming Week

Investors will look forward to the quarterly reports of banks, Goldman Sachs, Bears Stern, and Morgan Stanley. In addition, Oracle Corp and Palm Inc are releasing their quarterly reports. Economic indicators will begin with the Housing Index on Monday, third quarter Gross Domestic Product ( GDP ) on Thursday, and the Labor Department's report on personal income and spending in November on Friday.

Thanks for your business and have a happy holiday.

Posted by Jeff Sarkisian on December 17th, 2007 5:37 PMPost a Comment (0)

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Todays Fed Rate Cut

October 31st, 2007 4:13 PM

Today's FOMC adjournment brought us the expected quarter point rate cut that was expected by many, but the post-meeting statement created concern about inflation. The Fed referenced the weak housing market as a contributing factor to the change in short-term interest rates, but also indicated that inflation remains an issue, particu larly with the high energy and oil prices we are currently seeing.

The move and comments leads many to believe that the Fed will not make another rate cut in the near future. The stock markets have surprisingly reacted well to the news with the Dow up 131 points and the Nasdaq gaining 35 points. However, the bond market and mortgage rates have not faired so well. The bond market is currently down 23/32, which will likely revise this afternoon's mortgage rates higher by approximately .25 of a discount point from this morning's rates.

This morning's release of the 3rd Quarter Gross Domestic Product (GDP) revealed a 3.9% annual pace of economic growth, exceeding forecasts of a 3.1% rate. This means that economic activity was moderately stronger than expected. However, offsetting that was good news in the key inflation reading within the report. It showed a significantly lower reading than was expected, indicating inflationary pressures were we ll under control.

Also posted this morning was the 3rd Quarter Employment Cost Index (ECI), which tracks employer costs for salaries and benefits. It showed a 0.8% that was slightly lower than forecasts. This can also be taken as good news for bonds and mortgage pricing because it eases wage inflation concerns.

Now that the Fed meeting is behind us, we have to turn our attention to the remaining economic news of the week. There are a couple of high-impact reports still left to be posted that may significantly affect the markets and mortgage rates.

September's Personal Income and Outlays report will be posted early tomorrow morning. This data gives us an indication of consumer ability to spend and current spending habits. It is important to the markets because consumer spending makes up two-thirds of the U.S. economy. Rising income generally indicates that consumers have more money to spend, making economic growth more of a possibility. This is bad news for the bond market and mortgage rates because it raises inflation concerns, making long-term securities such as mortgage related bonds less attractive to investors. Analysts are expecting to see increases of 0.4% in income and 0.4% in outlays.

The Institute for Supply Management (ISM) will release their Manufacturing Index for October late Thursday morning. This index measures manufacturer sentiment and can have a considerable impact on the financial markets and mortgage rates. Current forecasts call for a decline from September's 52.0 reading. If we get a reading below 51.5, we should see mortgage rates drop tomorrow morning. On the other hand, a reading above 51.5, indicating manufacturing activity may be stronger than thought, could fuel a stock rally and drive mortgage rates higher.

If I were considering financing/refinancing a home, I would.... Float if my closing was taking place within 7 days... Float if my closing was taking place between 8 and 2 0 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

Posted by Jeff Sarkisian on October 31st, 2007 4:13 PMPost a Comment (0)

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Thgis week for Mortgages

October 29th, 2007 4:02 PM

THINGS COULD BE WORSE...much worse. While last week's news showed some weakness in housing and a few assorted economic reports, the Stock market seemed to fare pretty well with good reports recently from big bellwethers such as Apple and Microsoft. And home loan rates were stable to slightly improved for the week overall. But let's look back in time to exactly 78 years ago today, October 29th, 1929.

This day saw such crushing damage for the Stock market that it lives in history as "Black Tuesday", and is generally thought of as the day that sent the US into the Great Depression, where unemployment rates rose to a whopping 25%. Imagine one out of four of your neighbors, friends, and family members all being unemployed! So while last week's readings on housing, manufacturing and general consumer sentiment came in a bit weaker than expected - things could certainly be much worse.

And many of the soft economic reports helped confirm the market's general belief that the Fed will again cut the Fed Funds Rate at their upcoming meeting. But what will this mean for home loan rates? Read on to find out what even the media consistently seems to get wrong.

ONE THING YOU WON'T WANT TO GET WRONG IS EXAMINING THE OPPORTUNITY TO INVEST IN A 401K...BUT DO YOU KNOW WHAT KIND TO SELECT? THERE ARE SOME NEW OPTIONS THAT MAY BE AVAILABLE TO YOU - SO DON'T MISS THIS WEEK'S MORTGAGE MARKET VIEW.

Forecast for the Week

They say to be careful what you wish for...and with Halloween just around the corner, kids aren't the only ones wishing for a "treat". This Wednesday, October 31st, The Fed will decide if the financial markets will get a treat of their own with another cut to the Fed Funds Rate. It is very fitting that the decision on whether or not the Fed cuts rates happens on Halloween, because the "treat" may be a bit "tricky".

A Fed rate cut typically helps the economy and the stock market, but inflation hating Bonds and home loan rates usually have a negative reaction to a cut. This was evident last month, when the Fed's .50% cut sent Stocks soaring, but caused Bonds and home loan rates to worsen.

So should the Fed deliver another cut, Stock prices should enjoy a nice start to November, which is already historically the best performing month for Stocks since 1990. But it isn't a party for all, as rates on savings accounts will decline and home loan rates will likely blip higher. Additionally, Adjustable Rate home loans may be more in vogue, as the initial start rates will offer bigger discounts compared to Fixed Rate options.

A look at the chart below shows that Mortgage Bond prices are almost exactly where they were before the last Fed cut in September. Notice how Bond prices dropped right after the cut, which caused home loan rates to worsen. And should the Fed cut on Wednesday, it is quite possible that in response, home loan rates will worsen once again.

Chart: Fannie Mae 6.0% Mortgage Bond (Friday Oct 26, 2007)

Japanese Candlestick Chart

The Mortgage Market View...

A NEW 401(K) OPTION...

Last year, Congress authorized a new twist to the standard 401(k) plan that most employers offer. The new option, called a Roth 401(k) is just what it sounds like, a blend of the standard 401(k) and a Roth IRA.

So what's the difference?

As opposed to the standard 401(k) plan, where the initial contributions are not taxed, but your future withdrawals will be taxed, the Roth 401(k) allows for the opposite, which means that your contributions will be taxed today, but your withdrawals will not be taxed.

Of course, you do not pay tax on either type of account on an annual basis, as opposed to the capital gains taxes that are imposed on investments held outside of retirement accounts.

Which is the better option?

First and foremost - regardless of which option you choose - it is always a good plan to be investing for your retirement, especially when you are able to achieve tax benefits as a result.

You can select the best option for you by anticipating if your tax rate will be higher when you retire than it is today. If you are younger and just starting your career, it is likely that your current tax rate is lower than it will be in your retirement. Conversely, if you are in the height of your earning years, the reverse is probably true--your retirement income will likely be lower than your current earnings. The wild card is that the government may change the existing tax brackets by the time you retire.

So will taxes 20, 30, 40 years from today be higher or lower than current rates? While no one has a perfect crystal ball, and wanting to avoid a political discussion about economics, it would probably be safer to assume that taxes will be higher in the future than they are today. And if taxes withheld from your retirement are less, then it will give you more to spend.

Availability

At this time, only about 20-25% of employers are offering the new type of plan, but the number of participating companies is expected to grow steadily - so ask your human resource department about it if you are interested. Also, note that any payroll match that you receive from your employer will be based on the standard 401(k) plan and be taxed at withdrawal.

The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of October 29 – November 02

Date	ET	Economic Report	For	Estimate	Actual	Prior	Impact
Tue. October 30	10:00	Consumer Confidence	Oct	100.0		99.8	Moderate
Wed. October 31	02:15	FOMC Meeting					HIGH
Wed. October 31	10:30	Crude Inventories	10/26	NA		-5288K	Moderate
Wed. October 31	09:45	Chicago PMI	Oct	53.0		54.2	HIGH
Wed. October 31	08:30	Employment Cost Index (ECI)	Q3	0.9%		0.9%	HIGH
Wed. October 31	08:30	Chain Deflator	Q3	2.1%		2.6%	HIGH
Wed. October 31	08:30	Gross Domestic Product (GDP)	Q3	3.1%		3.8%	Moderate
Thu. November 01	10:00	ISM Index	Oct	52.0		52.0	HIGH
Thu. November 01	08:30	Jobless Claims (Initial)	10/27	325K		331K	Moderate
Thu. November 01	08:30	Personal Consumption Expenditures and Core PCE	YOY	1.7%		1.8%	HIGH
Thu. November 01	08:30	Personal Consumption Expenditures and Core PCE	Sept	0.2%		0.1%	HIGH
Thu. November 01	08:30	Personal Spending	Sept	0.4%		0.6%	Moderate
Thu. November 01	08:30	Personal Income	Sept	0.4%		0.3%	Moderate
Fri. November 02	08:30	Non-farm Payrolls	Oct	90K		110K	HIGH
Fri. November 02	08:30	Unemployment Rate	Oct	4.7%		4.7%	HIGH
Fri. November 02	08:30	Hourly Earnings	Oct	0.3%		0.4%	HIGH
Fri. November 02	08:30	Average Work Week	Oct	33.8		33.8	HIGH

Posted by Jeff Sarkisian on October 29th, 2007 4:02 PMPost a Comment (0)

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Mortgage Rates Drop

September 11th, 2007 11:00 AM

Looks like Mortgage Rates are moving our favor after last weeks jobs reports, hopefully that will stir up some activity in the local housing market.

Posted by Jeff Sarkisian on September 11th, 2007 11:00 AMPost a Comment (0)

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