The FED cut the Discount RATE so what
So friday mornings I try to take my loan officers out to Utah lake early so that we can get some good water and still make it back the office prior to the day really getting started. I wont bore you with all the details today, but let me just tell you that we never got out of the marina due to the boat not starting. After about an hour of disconnecting wires and getting all ticked off I realized someone pulled the kill switch and nothing worked.
The kill switch just shuts the boat down and it wont run. Let me try to tie this into a mortgage analogy. The current liquidity crisis that is BEATING this market up and down is similar to pulling the kill switch on a boat. When you have solid lending insitutions like Countrywide and Thornburg on huge stock slides and possible rumors of BK, you have to question, WHO PULLED THE KILL SWITCH? The mortgage markets for all practical purposes have shut down. Sure you can still get a loan, and banks are still closing them, however I am watching my rate sheets on a daily basis and although the 10 yr bond is rallying like I have never seen, our conforming and more importantly VA/FHA rates are not really doing much.
So if you are still surviving and are in the loan business than today you are feeling mixed emotions. As we are pulling off the lake after a suprise morning of a broken down boat(kill switch) I ask some of my LOS if I can turn on XM and listen to the market. What happened???? I am hearing all sorts of talk about a suprise 50 bps rate cut to the discount rate!?!?!?!? Holy crap, this is great right? WRONG. Here is the dilemna I have faced every single time there is a rate cut. Borrowers that are in processing automatically think that because the FED cut rates that I need to lower their rates by a 1/2 point also. I tell you it is so frustrating to try to have this converstion with an average JOE home owner.
So what is the discount rate and why won't it affect mortgage rates like the Fed Funds Rate?
The discount rate is the rate at which banks/lenders can borrower money directly from the Fed Reserve. This basically means that in light of this liquidity crunch as it is being called, that now banks can g to the FED and borrow money cheaper than they could yesterday. This will obviously help at least a little. HOWEVER, this is not the same thing as CUTTING THE FED FUNDS RATE, which is what our genius Alan Greenspan did something like 20 times in a row from 2000- June 2003. Cutting the FED FUNDS Rate would have had a more immediate effect on MORTGAGE markets because this is the rate at which banks can lend out money to eachother and this has a much more direct affect on credit card rates, home loan rates and even auto rates. I personally think the FED will also be cutting this key rate sometime in the next few months solely because the discount rate they just cut will only have a temporary effect, not a long term one!
So what does all this mean now? I think we are still only seeing the beginning of what will go down in the econ history books! I am telling you that WE brought this on ourselves. What were we thinking when we were giving loans like this? 100% stated income NO MI down to 580 fico? Centex home equity reps were here just 3-6 months ago taking these loans left and right. What did that accomplish? Moron people that could not balance a check book, let alone pay a bill on time were out buying HUGE homes. This in turn drove home prices to insane highs nationwide and now we have tons of new homes, new homeowners, and a softening real estate market. So now these home owners cannot make their payments since all the arm rates are going higher, they cannot sell the home since they bought the home at its high and even if they could sell the home to someone that wanted it, the LOAN program that they would have qualified for a month ago, IS NO LONGER THERE since someone tripped the kill switch. So what can be done to help? Step in HUD/FHA and the department of veterans affairs. Here is what I think the government insures like FHA and VA need to do:
Raise max loan amts
FHA needs to go 100% financing
allow 40 yr amort
VA needs to allow NON SPOUSE co-borrowers
VA needs to do away with JUMBO REFI WORKSHEET
VA need to follow FHA and go to 95% cashout refi
The kill switch just shuts the boat down and it wont run. Let me try to tie this into a mortgage analogy. The current liquidity crisis that is BEATING this market up and down is similar to pulling the kill switch on a boat. When you have solid lending insitutions like Countrywide and Thornburg on huge stock slides and possible rumors of BK, you have to question, WHO PULLED THE KILL SWITCH? The mortgage markets for all practical purposes have shut down. Sure you can still get a loan, and banks are still closing them, however I am watching my rate sheets on a daily basis and although the 10 yr bond is rallying like I have never seen, our conforming and more importantly VA/FHA rates are not really doing much.
So if you are still surviving and are in the loan business than today you are feeling mixed emotions. As we are pulling off the lake after a suprise morning of a broken down boat(kill switch) I ask some of my LOS if I can turn on XM and listen to the market. What happened???? I am hearing all sorts of talk about a suprise 50 bps rate cut to the discount rate!?!?!?!? Holy crap, this is great right? WRONG. Here is the dilemna I have faced every single time there is a rate cut. Borrowers that are in processing automatically think that because the FED cut rates that I need to lower their rates by a 1/2 point also. I tell you it is so frustrating to try to have this converstion with an average JOE home owner.
So what is the discount rate and why won't it affect mortgage rates like the Fed Funds Rate?
The discount rate is the rate at which banks/lenders can borrower money directly from the Fed Reserve. This basically means that in light of this liquidity crunch as it is being called, that now banks can g to the FED and borrow money cheaper than they could yesterday. This will obviously help at least a little. HOWEVER, this is not the same thing as CUTTING THE FED FUNDS RATE, which is what our genius Alan Greenspan did something like 20 times in a row from 2000- June 2003. Cutting the FED FUNDS Rate would have had a more immediate effect on MORTGAGE markets because this is the rate at which banks can lend out money to eachother and this has a much more direct affect on credit card rates, home loan rates and even auto rates. I personally think the FED will also be cutting this key rate sometime in the next few months solely because the discount rate they just cut will only have a temporary effect, not a long term one!
So what does all this mean now? I think we are still only seeing the beginning of what will go down in the econ history books! I am telling you that WE brought this on ourselves. What were we thinking when we were giving loans like this? 100% stated income NO MI down to 580 fico? Centex home equity reps were here just 3-6 months ago taking these loans left and right. What did that accomplish? Moron people that could not balance a check book, let alone pay a bill on time were out buying HUGE homes. This in turn drove home prices to insane highs nationwide and now we have tons of new homes, new homeowners, and a softening real estate market. So now these home owners cannot make their payments since all the arm rates are going higher, they cannot sell the home since they bought the home at its high and even if they could sell the home to someone that wanted it, the LOAN program that they would have qualified for a month ago, IS NO LONGER THERE since someone tripped the kill switch. So what can be done to help? Step in HUD/FHA and the department of veterans affairs. Here is what I think the government insures like FHA and VA need to do:
Raise max loan amts
FHA needs to go 100% financing
allow 40 yr amort
VA needs to allow NON SPOUSE co-borrowers
VA needs to do away with JUMBO REFI WORKSHEET
VA need to follow FHA and go to 95% cashout refi
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