Meet the Feds

FED TO BUY ADDITIONAL $750 BLN OF MBS, $100 BLN OF GSE DEBT
FED LEAVES TARGET INTEREST-RATE RANGE UNCHANGED AT 0% TO 0.25%
FED TO PURCHASE UP TO $300 BLN OF LONGER-TERM TREASURIES
FED SAYS INFLATION MAY PERSIST BELOW `BEST' LEVEL
FED SAYS NEAR-TERM ECONOMIC OUTLOOK IS `WEAK'
FED SEES `EXCEPTIONALLY LOW' FUNDS RATE FOR `EXTENDED' PERIOD
FED TO CONTINUE MONITORING BALANCE SHEET SIZE, COMPOSITION
FED VOTE ON MONETARY POLICY IS UNANIMOUS *FED SAYS ECONOMY `CONTINUES TO CONTRACT'
FED TO BUY TOTAL OF UP TO $1.25 TRILLION OF AGENCY MBS IN 2009
FED TO BUY TOTAL OF UP TO $200 BLN OF GSE DEBT IN 2009
FED SAYS TALF TO EXPAND TO INCLUDE OTHER `FINANCIAL ASSETS'
FED SAYS INFLATION WILL REMAIN SUBDUED *FED TO USE `ALL AVAILABLE TOOLS' TO HELP ECONOMY RECOVER

Looks like rates are going lower...

So much happening it's hard to stay on top and blog

The Libor rate has been called into question lately as perhaps being artificially low, this will affect many borrowers who have an ARM that will adjust based on Libor. A Citibank analyst was quoted in the Wall Street Journal last week saying that banks may not be disclosing their true borrowing costs when reporting the rate at which they borrow, and more importantly there is no way to calculate a 1 year Libor rate when the longest one bank will loan to another is 3 weeks.

Also the Fed is meeting again this week, so it's bound to be a bumpy ride in the mortgage rate market this week. So far so good this week, with rates dipping slightly, but I'm unsure what's going to happen if the Fed cuts their rate this week, are inflationary concerns going to drive up rates, or will the recent economic slip allow rates to be maintained at their current levels.

Fed Slashes Their Rate

The Fed has cut their rate twice in the last 2 weeks dropping the Prime Rate to 6%. That's very good news for long suffering Home Equity Line of Credit borrowers. They've paid as their rate went from 4% (yeah that's right) to 8.25%, now back down to 6%. Some jumbo mortgage borrowers now have a Home Equity Line of Credit at a rate lower than their 30 year fixed 1st mortgage.

The Fed Rate is not directly tied to 1st mortgage rates, as many think. The Fed Rate is the the interest rate at which banks borrow money for day to day business needs, or to shore up their overnight reserves. 1st mortgage rates are more closely tied to the 10 year Treasury bond yield. That's what consumers should be watching to find out if it's time to refinance.

The Fed Rate is directly related to the Prime Rate though, so Home Equity Line of Credit borrowers should keep track of that rate closely. There should be some payment reductions coming the next billing cycle. One suggestion as the Home Equity Line of Credit rates drop: Keep making the same payment as when the rate was much higher, that way you will pay down some of the principal. Generally, the payment due on your statement is an interest only payment. If that amount is paid the principal balance remains the same, the debt is being serviced, but not paid down. A discretionary principal payment must be made each month in order to payoff this type of mortgage loan. And the way this loan's rates fluctuate up and down, it's a good idea to pay it down as much as possible.

Fed Rate Cut, Why Not My Rate?

The recent Fed rate cut to 4.75% is more directly related to the interest of Home Equity Lines of Credit as they are generally tied to Prime (currently 7.75%). Since Prime floats 3% above the Fed Rate there is a direct relationship between the two.

Counter-intuitive though is why the 30 conforming (Fannie and Freddie) fixed mortgage interest rate has gone up a bit since the most recent Fed rate cut. The bellwether for the conforming fixed rate is the 10 year treasury bond yield. That has been increasing as investors have been selling off bonds the last few days. The reason for the sell-off is that investors worry that the Fed rate cut might kick-start inflationary pressures.

So, despite people's wish for the opposite, the Fed rate cut has negatively impacted mortgage rates for the short term.

Fed Rate to Stay the Same?

Some 20 economists recently surveyed by Securities Industry and Financial Markets Association, believe short-term rates will hold steady at 5.25% for the next seven quarters. Some of these same economists also believe oil is going to be at $50 a barrel next year. (currently $70 a barrel.)