Mortgage Mania - Part 12, Ben beats the spread

September 18, 2007

Todays’ big news is that The Fed cut the Federal Funds rate by half a point to 4.75%, the first cut since 2003, and soundly beating the pundits’ estimates of a quarter point cut. The FOMC also cut the discount rate by 50 basis points to 5.25%.

Wall Street was positively giddy on the news, with the Dow Jones surging over 330 points following the announcement.

More important for us, this is good news for second mortgages and home equity lines. These lending instruments are generally pegged to the Prime Rate or London Inter-Bank Overnight Rate (LIBOR). While not a direct link, changes in the Federal Funds rate are pretty well correlated to changes in interest rates on second mortgages and credit lines.

This is good news to consumers who are struggling with upwardly indexing adjustable rate loans. Since they index up on rising rates, they also tend to go down with falling rates. Locally, where the median home price in Palo Alto is currently about $2.3M , and a large number of buyers are using second mortgages, a change of .5% on a 6% mortgage makes a significant difference in monthly payments (about 15% in this example). When you are talking about mortgage payments of $10,000 a month, that 15% covers the payment on both the BMW and the Mercedes in the driveway.

In its statement, the Fed did not signal further rate cuts and said that some indications of further inflation risk remain. There was no mention of irrational exuberence or other Greenspan-isms.

You can read the full statement from the Fed here.

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Written by Chris Iverson, Realtor · Filed Under Real estate 

Comments

One Response to “Mortgage Mania - Part 12, Ben beats the spread”

  1. Robert Newsom on September 20th, 2007 12:53 pm

    Subject: The “Sub-Prime Issue

    > I think the blogging communities should come together on this “SUBPRIME
    > ISSUE”.–Why?-Because Wall Street has sold these so-called securities all
    > over the world, aside from all the derivatives the banks are holding. We
    > need a national program like the “War Bonds” to raise enough money to buy
    > all subprime loans made from approx. 2002-2006 and replace with 5% 30yr
    > fixed, fully amortized loans. We can eat the losses with the bond
    > guarantee by the Federal Reserve, or/and ask Bill Gates and Warren Buffet
    > to co-chair the program and bring in the Builders, Realtors, Mortgage
    > companies and WALL Street in to solve this issue before it spreads much
    > worse than the 1990’s RTC fiasco.People are just getting up and walking
    > away. Banks are giving REOs to asset companies who do not even water the
    > property let alone anything else. (Giving 100-300 properties to companies
    > that cannot handle them.) And, ~YES, there are jobs paying
    > what~~???~~~Where are the buyers going to come from~~~??? We, are becoming
    > a Fascist Economy ;With the Rich at the top and the others on the Bottom
    > with very little middle class.The average CEO in the 40s-70s made
    > 15-25-times a workers pay~~~Now its 300-700-times per the New York Times
    > article I read over 6-9 mos ago. The Congress and Business Roundtable
    > better get a gripe (Stop the pout-flow of “GOOD” paying jobs or have the
    > next Generation inherit a 2-3 class country). Have all our “So-Leaders
    > read George Washington Farewell Address next ~Look around Europe *&*
    > many others are saying this out-souring is not working. Only our American
    > leaders do not know this. And is it true “Cheney’s old company moved to
    > the U.A.E~?: and that Clinton / *&* Bush Sr, have consultant contracts
    > with Saudi Arabia .~?~? Where is American fairness to Americans~?~?
    >
    > Thanks-
    >
    > Bob Newsom-Pres.-A REAL ESTATE SUPERSTORE,INC.
    >
    >
    >
    > Anyone interested in helping in a USA letter campaign can write to 41396
    > Bitter Creek Ct Temecula, CA 2591 all letters will be forwarded together
    > to Congress. ( Donations for this campaign will be graciously
    > accepted.)for ads mailing etc., . E-Mail : light@quixnet.net

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