Why Fed Rate Cuts Do Not Equal Lower Mortgage Rates

This is a copy of an email that came to me from Keith Borngesser of Mortgage Bankers of WI:

By Barry Habib, CEO

Last Updated: February 28, 2008

The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent five Fed rate cuts. This is difficult to explain to consumers who have watched a 2.25% reduction by the Fed with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.

It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.
The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.

Now let’s take a look at what happened with the Fed’s most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a “knee-jerk” reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. So far this year, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp. Within 13 days from that 50bp cut, mortgage bonds lost 269bp.

Keith then closed the email by saying:

Remember that a loss in bp(basis points) means an increase in mortgage rates. As volatile as the market is right now I do not want to forecast too much, but the experts are looking for short term lowering of mortgage rates.

Have a great weekend.

Keith

Keith Borngesser
Mortgage Bankers of Wisconsin
16655 W Bluemound Road STE 330
Brookfield, WI 53005
262-784-6600 x 224
262-784-6699 fax
262-391-9450 mobile

Home Buyer Seminar, Waukesha

Where will you live when your lease is up?

A home is the smartest investment you'll ever make.

HBC Services is a non-profit, HUD certified agency which offers free home buying education and credit counseling. Grants and downpayment assistance up to $5,000 may be available to qualifying buyers.

Attend "The Home Buyer's Advantage" Seminar! Realtor speaker Sarah Steelman will explain the home buying process and answer any questions you have. Other professional guest speakers include a mortgage lender, home inspector, and homeowners insurance agent.

DATE: Monday and Tuesday, February 18th & 19th
TIME: 6:00pm - 8:00pm
LOCATION: Goodwill Industries (west end offices)
Community Service Center
1400 Nike Dr., Waukesha, WI 53186

Monday's speakers will be Realtor Sarah Steelman and a mortgage lender. Tuesday's speakers will be a home inspector and insurance agent.

Reservation required! Please call Gina Sanchez, HBC Services, at 262-522-1230 or email gina.sanchez@hbcservices.org.

Visit www.sarah-steelman.com for more information.

Real Estate in December

Oh yes, it is once again that time...the area between Thanksgiving and Christmas where everyone is thinking about the traveling they'll be doing, the groceries they need to buy for entertaining, the gifts, the mall, the kids programs, the new black dress they want....ok so not everyone will want a new black dress. But, this is the time where the last thing on MOST people's mind is buying a house. And while this is the 'slow season', people are still out there wanting to move. Alot of job transfers happen at this time, and they need a home. The end of the school's 2nd semester is coming up, a good time to move the kids at. Also, right now in our local area (Waukesha, Milwaukee) our interest rates are as low as 5.75% for a fixed 30 year loan! So when people ask me if now is a good time to buy, my response is inevitably YES!

Wisconsin Transfer Tax Fee Shot Down!

Recently, Gov. Jim Doyle tried to pass a bill to double the WI transfer tax fee. The transfer tax fee is the tax you pay on your home when you sell it, and stands at $3 per every $1,000 of the sale price.

I am very happy to say that this bill has been defeated and the tax will not raise!

The National Realtors Association and the Wisconsin Realtors Association have worked hard to protect home sellers and we have lobbied against this bill since day 1. Our local market remains strong with thanks to their combined efforts.

Milwaukee Housing Market

I recently was the guest speaker at a First Time Homebuyer Seminar. One thing I really wanted to do was ease their minds about the local housing market. I found an article in the Milwaukee Journal Sentinal (September 11, 2007) that pretty much summed it all up and read that to the class. It was a letter to the editor written by Mike Ruzicka, President of the Greater Milwaukee Association of Realtors, and it goes exactly like this:

HOUSING

News locally is not all doom and gloom

While national housing figures are newsworthy, running the Sept. 7 article with its fervent headline "Housing market in for worse?" on the front page was a disservice to readers. Implying that national housing statistics directly apply here is like checking the weather for the entire United States and assuming the temperature is the same in Boise, Idaho, Houston and Milwaukee.

Foreclosures have increased, but 96% of homeowners in the state are not in trouble and are making their payments. The small increase in foreclosures we have seen is largely a dynamic of the subprime market: greedy Wall Street firms backing loans with overly optimistic terms to people who were marginally able to get into the housing market.

Over the next year, about 10,000 adjustable rate mortgages will reset in our market, but very few will default. That is because homeowners will refinance, just as they had intended when they originally took out the loans.

Readers would have been much better informed with just the facts and less zealous innuendo. The market may get worse - in seven other states. Locally, homebuyers can expect an economy that is in good shape, a variety of homes to choose from and interest rates in the 6% range.

Closing On Your Home

The mortgage loan closing (or settlement) is the final step to official ownership of your new house. Even though you have a signed purchase contract and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and the loan is closed.
Every area of the country has its own unique closing customs. Your REALTOR® can guide you through this process and make sure everything flows together smoothly.

At closing, you will sign the mortgage loan documents and pay your closing costs, the seller will execute the deed to the property, and the closing agent will record the necessary instruments to give you legal ownership of the property.

Closing costs vary widely depending on your new home’s price tag, location and other factors. Overall, you can expect to pay between 1 and 3 percent of the sales price.

As soon as you receive your commitment letter from your lender, you should confirm the actual date of loan closing. Usually your real estate agent, lender and closing agent coordinate a date with you. You want to make sure that closing takes place before your loan commitment expires and before any rate lock agreement expires. The closing date also has to allow adequate time to assemble all of the required documentation.

There are standard documents and exhibits that are commonly required for a loan closing. Some of these will be your responsibility. Some of these will be the responsibility of other parties to the transaction, such as the seller and lender.

--Article taken from www.wra.org

Foreclosure Crisis

Foreclosure Crisis

September 6, 2007

I was watching the nightly news tonight, something I rarely do since my tv never changes from the Nickelodean/Cartoon Network, and a story was on named the 'Foreclosure Crisis'.

Granted the media usually makes the real estate market seem much worse than it is, this is actually a true crisis that is happening within our present day market.

The first thing to do to correct this is to find what caused it. The main reasons: loose lending requirements and adjustable rate mortgages. Combine these two together with a borrower who only lives for the moment and you've got trouble just waiting to happen.

An adjustable rate mortage will have a 'teaser' rate to begin with, typically for 1 or 3 years. This teaser rate, 3 years ago, was much, much lower than the normal 30 year fixed rate mortgage. And the lending requirements....bad credit, no credit, no downpayment....some of these lenders were just letting it all fly out. Recently, a lot of lenders have gone belly up. 3 years ago it was still a seller's market, and some people were paying over inflated prices for their homes. That is part of the reason why they can't just refinance now...the property isn't worth what they paid for it!

So what can a new borrower do to make sure they

don't fall victim to the mortgage crisis? Have a nice amount saved up for a downpayment, that way you'll have wiggle room should the market decline. Also plan for the long run. Go with a fixed rate mortgage so you know your payments won't increase. You'll also need to keep your credit score up. Lenders are becoming much stricter in their lending practices.

Remember, right now it is a BUYER'S market. With historically low interest rates and alot of inventory to chose from, right now is a great time for a well qualified buyer to buy!