FHA Loans and FHA Mortgages

Today, the Federal Reserve and other central banks globally cut their funds rate a 1/2 percent.  The decision today reduced the Fed’s benchmark to 1.5 percent and lowered its discount rate by the same amount to 1.75 percent. This was in fear of global market turmoil and trying to stimulate the U.S. economy.  Because of this move, the stock market moved in a positive manner, up slightly this morning. It gained 100 points early this morning, but not has lost 196 points as of 12:20 pm EST.

The Fed’s Open Market Committee voted unanimously for today’s move, said in a statement, “incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial-market turmoil is likely to exert additional restraint on spending.”

 WARNING…. WARNING…… WARNING…..

This is not to say that mortgage interest rates have dropped. Sometimes in the past, mortgage interest rates did become lower in weeks after the Fed drop. There have been times when rates went up. There are many variables for these two factors to take place. Sometimes rates were lowered previously to the Fed lowering the discount rate.  The issue here is that its extremely hard now to predict where rates would go. Even by those that call themselves experts, it’s a flip of a coin. If correct, they are geniuses, if not, they are failures. Keep in mind, they have a 50% chance to be a genius.

The discount rate is for short term lending. The mortgage interest rates are when it comes to financing your property are considered long term rates. 

Overall, there is no true indicator to how rates will rise or fall anymore. It was a safe rule of thumb to say when the stock prices fell, the bond market became better in which mortgage rates became better. The indicator to watch for this is the 10 year bond.  At close of business yesterday, the 10 yr bond closed at a yield of 3.59. At 12;28 pm EST today, the 10 yr yield is now 3.67. This increase usually means that mortgage interest rates will go up.

A few topics of conversation and key points……

  – It’s been said that the short term rate reduction is a good thing, but for long term, it probably won’t have a giant effect.

  – This will not help the real estate market out of its troubles, but it should help the financial sector.

  – What the authorities are trying to do is to stabilize the current situation in the credit and money markets.

  – A reason for the Fed Rate cuts is seen as inflationary and inflation is not good for mortgage rates.

  – The bottom line, this news from our government is just trying to instill consumer confidence.

There is a lot more detail that I could give you, but you need to have a simple understanding to when you hear that the Feds lowered interest rates or that the Feds cut rates, it doesn’t mean that mortgage interest rates went down also.  I just wanted to make this simple to understand.

The definitions below are from Bloomberg News. 

Federal Open Market Comiittee - 
The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System.

The Feds Fund Rate -
The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction of US interest rates. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate.

The Discount Rate - 
The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings. In context of NPV or PV calculations, the discount rate is the annual percentage applied. In the context of project financing, the discount rate is often the all-in interest rate or the interest rate plus margin. 

Mortgage Back Securities (MBA’s) 
Securities backed by a pool of mortgageloans.

WARNING…. WARNING…. WARNING……  As I have been writing this, it’s now 1:30 pm EST, and the stock market has only lost 80 pts now, yet the 10 yr yield as now risen to 3.82. That is an increase of .23 since the close of business yesterday. For mortgage rates, that is not a good sign. And as this went on, we just received a interest rate freeze from our investors, which means that mortgage interest rates will become higher later today. As you can see, it will be a yo-yo for the next few months, just as it has been for the last several months. One other key factor to the rise and fall of mortgage interest rates are the MBA’s. Mortgage Backed Securities. Again, this could get confusing, so I will leave this alone for now.

****Don’t play with the float / lock game unless you are speaking to a true mortgage professional.

- FHA Loans - FHA Mortgages - Conventional Loans - VA Loans -

Experience & Knowledge at its BEST !!!