Archive for January, 2008

Volatility Reigns

January 30, 2008

The Rate Slasher did return (see this previous post), and, as expected, the Feds dropped the funds rate by 0.500%. So how is this going to affect rates? Honestly, who knows?

The marketed had mixed reactions. Initially, bonds slipped while stocks went up. Then they reversed as bonds made back up their losses and stocks actually finished down on the day.

Check out all of the business/financial sites on the internet. You can find articles hailing Bernanke and the Feds, and others saying the Feds have gone too far. Some are saying that a .750% cut followed by a .500% cut a week later is actually sending the wrong message and investors feel things are actually worse than previously thought. Others feel this will be a soft landing and help turn the economy around.

When you add in some negative news on inflation, the situation gets even more uncertain. The one thing that is certain is, for now, volatility is the name of the game. If you are sitting on the fence hoping rates will get even lower, now might be a better time to take advantage of where rates are today instead of hoping and waiting for something that might not happen.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

What is the Federal Funds Rate?

January 23, 2008

It seems stories on the economy and the Feds are in the news everyday. Because of that, it seems this blog and news sources often talk about the Federal Funds rate. But what does the federal funds rate do, and how does it impact mortgage rates? To answer those questions…

The federal funds rate has a direct impact on the rate at which banks borrow and lend money. The Fed rate determines prime rate, which follows along with the federal funds rate. For instance yesterday, the Fed rate dropped from 4.25% to 3.5%, and prime rate followed by dropping from 7.25% to 6.5%. Banks use prime rate to determine rates for 2nd mortgages, home equity lines of credit, credit cards and car loans.

While this is helpful for 2nd mortgages, 1st mortgages generally suffer. I know what you are thinking — but why? There are some reasons, and I will list them below. First remember mortgage rates are determined by the mortgage-backed securities bond market. When more money is invested into bonds, bond prices go up, and mortgage rates go down. However, when more money is put into stocks, less money goes into bonds… bond prices go down… mortgage rates go up… etc.

With that in mind, here are the ways in which cuts to the federal funds rate tend to hurt 1st mortgage rates:

– Federal funds rate cuts increase investing: If banks (and people) can borrow money at a cheaper rate, they are likely to increase their investments in the stock market. This means that more money is being put into stocks, and less money goes into bonds (not to mention money being taken out of bonds to invest in stocks). This action causes bond prices to go down and mortgage rates go up.

Federal funds rate cuts cause inflation. Again, if banks (and people) can borrow money at a cheaper rate, this leads to an increase in spending. With an increase in spending, the demand for products and services increases, which drives up the prices of those products are services – otherwise known as supply and demand. The increase in price is inflation, and bonds hate inflation because it hurts the value of the U.S. Dollar. If it costs more money to buy the same goods or services today than it did yesterday, it means the Dollar has lost some of its value. Again, bond prices go down and mortgage rates up.

Federal funds rate cuts decreases the value of the U.S. Dollar: Inflation hurts the value of the Dollar, which also makes foreign goods more expensive to buy. This may be all well and good for individuals concerned about our trade deficit, but it still costs more money for companies to buy the same products that they turn around and sell to us in stores. The price increase is passed on to us, the consumer.

Right now the bond market is doing rather well. This is due primarily to the slowing down of our economy, which has led to the Feds making several cuts to the federal funds rate. At some point, these cuts will catch up to the bond market and rates will go up. This is why I advised anyone looking to refinance or purchase a home to consider locking in sooner rather than later. Take advantage of the gains in the market that have put us near all-time record lows for fixed rate mortgages before the market turns around.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

The Rise of the Rate Slasher

January 22, 2008

To the horror of all inflation watchers, the Federal Funds rate was cut 0.75% this morning by the Feds. Just like a bad horror movie, the news for economists who are wary of inflation keeps getting worse. In this instance, the Feds didn’t seem to have many options, but this move was unexpected and surprising for a couple of reasons.

First, the decision to cut or raise the Federal Funds rate is normally decided at regularly scheduled meetings. The next meeting takes place on Jan 30th. Second, the size of the cut is, well, shocking. This is the largest rate cut since 1991 and was done to help spur on a slumping US economy and ease fears of an economic recession.

Typically rate cuts produce a surge in the stock market and losses in the bond market. However, the combination of an inter-meeting cut along with the size of the cut produced mixed results. The stock market started the day down over 400 points, and the money coming out of stocks went into the bond market. Over the course of the day, stocks have made up most of the losses (finishing 128 points down) while bonds continued to gain some ground. However, the lasting effects of today’s cut (post-market-knee-jerk) may take a day or two to sort out. In fact, if not for the cut, the early losses of over 400 points may have only been the beginning.

So even at the end of the day, we still have mixed results. Investors may be viewing the unexpected and significant rate cut as a sign that the economy is in worse shape than previously thought and the Feds are acting out of desperation. However, the rebound in stocks over the day may signal brighter days ahead.  Also, inflation is still a concern, and could work against mortgage rates.  We will get some insight into inflation toward the end of next week when some economic reports are released. As I blogged a couple of weeks ago, it will be interesting to see how this all plays out.

What should you do in a volatile market? If you are refinancing or buying a home, I would consider locking in your rate soon. The bond market has performed well several weeks in a row, and this run won’t continue forever. Taking advantage now of the gains in this volatile market instead of waiting for rates to go down may be the best course of action in the long run.

There is one indicator that will support my last claim. Even with today’s cut, Federal Fund futures still point to another rate cut at the next scheduled meeting (Jan 30). There may just be a slashing sequel to today’s cut – The Return of the Rate Slasher – making inflation figures worse, which leads to higher mortgage rates.

rise-of-the-rate-slasher.jpg

As a friend of mine always says… “Sometimes the bulls win. Sometimes the bears win. Pigs get slaughtered. Don’t be a pig”…

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Between a rock and a hard place

January 15, 2008

The Feds find themselves in the unenviable position of “being between a rock and a hard place.” Economists have been predicting a recession for some time now. In the last few months of 2007, the Feds took steps to keep this from happening by lowering the federal funds rate and discount rate. The series of cuts did spur spending and investing in the stock market (as is typical with a cut). So what is the initial outlook for 2008?

Goldman Sachs is one of the largest investment banks in the world, and they offer their financial advising services to wealthy families, large corporations and governments. Their 2008 forecast predicts a recession for 2008 along with a growing unemployment rate to reach 6.5% by 2009. Unemployment is currently at 5.0%.

Goldman is also forecasting the Fed will continue to slash the Fed Funds rate until it reaches 2.5% by the third quarter of this year in an effort to achieve a “soft landing” for the economy.

…Interestingly enough, a couple days after Goldman released their forecast, Bernanke said the Federal Reserve would take steps to help keep the country out of a recession and would cut rates to do it…

If Goldman continues to be right, it would mean the Fed Funds rate would be cut by another 1.75% from their present level of 4.25%. Keep in mind that with every rate cut the odds increase for a rise in inflation and the weakening of the U.S. Dollar. Sadly, this is happening. Inflation figures are up and the U.S. Dollar is near all time lows versus the Euro and the Pound.

With today’s news of poor retail sales in December and Citigroup taking a $10 billion loss, as much as Bernanke says he wants to fight inflation, the Feds may not have a choice. So, which do the Feds prefer, the rock (recession) or the hard place (inflation)? It seems the economy is – for now – forcing them to choose the hard place, inflation, and the Fed funding rate will continue to be cut to stimulate the economy.

What does this mean for interest rates? It is really too early to tell, but rate cuts cause inflation to rise. Rising inflation causes mortgage rates to go up. Whereas poor economic news (and we are seeing a lot of it lately) is actually good for rates, and mortgage rates go down.

So, who is going to win? For now, the bad economic news is winning out as rates are at their lowest levels since June 2005. However, if the Feds combat this through continued and significant rate cuts, at some point inflation figures will go up, which will make mortgage rates go up. It will be interesting to see how this plays out in the coming months.

Is “change” always a good thing?

January 9, 2008

“Change” is the buzz word going around right now. As presidential candidates are vying for votes, they all want to be seen as the candidate that can bring change. Political affiliations aside, here is the latest on changes in the way lenders set rates for borrowers.

We are all aware that 2007 was not a great year for the subprime market, and has lead to many subprime (and prime) lenders changing their guidelines, ending loan programs, or even closing their doors. We have been reading about this for months now, but subprime woes caused lenders to re-evaluate other loan programs and guidelines too — including loans for people with average and above average credit!

For instance, two years ago borrowers with a credit score of 680+ received the exact same rate. It didn’t matter if your score was 680 or 800, the rate was the same. Now lenders are making changes to the way credit scores affect rates, and the days of everyone with 680+ credit scores getting the same rate are over.

Here are some example rates for someone buying a $200,000, owner-occupied home with a 20% down payment. Remember that rates change everyday, but this will provide an idea of what is happening.

— 720+ score rate is 5.375%
— 680 – 719 rate is 5.500%
— 660 – 679 rate is 5.625%
— 640 – 659 rate is 5.750%
— 620 – 639 rate is 5.875%
— less than 620 rate is 6.000%, and that assumes the lender will accept a conforming loan with a credit score under 620, which is not likely in this market.

change“I will bring change, and it will better than theirs, promise!”

As all the presidential candidates put a positive spin on the change he/she will bring if elected, not all the changes proposed are beneficial for everyone. Changes in the subprime market were necessary, but recent changes for borrowers with average and above average credit is unfortunate. It seems we are all going to continue to feel the pinch from subprime foreclosures.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.