9.19.2007

The FED lowered rates, why didn't my mortgage payment go down?

So, the FED lowered two rates yesterday, and the S&P 500 index is up about 3.5% over the two days... so this is a good thing right?

Ask yourself this question - "what does that mean to me?"

If you answered with some form of "now the rate on my variable-rate mortgage will go down...", you should realize that your variable rate mortgage is tied to an INDEX, not the FED rate. more than 90% of variable rate loans are tied to the LIBOR, which is short for London Interbank Offered Rate.

As the LIBOR goes, so goes the rate on your mortgage.

Have you been watching the news on the LIBOR lately? I didn't think so.

Here's a snap-shot:

The British Bankers' Association said the overnight LIBOR -- the interest rate banks charge each other -- remained steady at 6.47% on Monday. The rate, however, remained significantly higher than the 5.87% rate seen on Thursday and Friday. Three-month and twelve-month LIBOR rates set fractionally lower than on Monday, the association said.


From 5.87% to 6.47% is more than a half-point move in the WRONG direction. Overnight. The London folks were sitting on the sidelines watching the Great American Credit Fiasco, thanking their lucky stars that they hadn't been sucked into it, then they realized they HAD been sucked into it when it was noted how many British and European institutional lenders and banking organizations were SHAREHOLDERS in the very same American funds that were now showing themselves to be nothing more than junk bonds.

When they discovered that, the LIBOR went from 5.87% to 6.47%.

And if you have a one-month LIBOR loan (the rate is calculated every month), your rate moved .6%. Overnight.

I bet that was fun.

And in the category of "It's not the rate, it's the program", here's something else...

The FED lowers the rate to try to bring some capital back into the markets, which, if you have been watching the markets in the last two days, you know it HAS, but here's The Thing:

No institutional bank/buyer (who has money available) is going to put its money back into the bond market until the big lenders can prove that they are making responsible loans that will perform and not end up in foreclosure. It's that simple. And as long as those institutions AREN'T buying loans in the secondary market, the lender who made the loan has to keep it, tying up money that could be freed up and loaned out again. This KILLS any lender that isn't THE MOST CONSERVATIVE LENDER ON THE PLANET.

For example, yesterday, Countrywide said they are OUT of any kind of loan business that is not Super Prime, in an effort to convince the market that they are making responsible loans now, please buy them. This is the same Countrywide who, in the last three weeks has borrowed more than 20 BILLION dollars in an effort to stay afloat and make loans.

Until the banks begin to trust lenders again, it doesn't matter what the rates are.

Compared to 12 months ago, there are about 25% of the loan programs available now that were available then. Some may say that's a good thing - we'll see how many lenders exit the business. I can tell you that banking industry layoffs are putting a drag on the economy. Couple that with looming foreclosures, BKs, which will surely follow, and we might be looking at a perfect storm.

My advice for people in the markets: I hope you were holding significant gold futures. Seriously.

6 comments:

OneHungMan said...

Agree with everything you said, but the home equity lines should all be falling...correct?

Also, OneHung and one of the owners of his company (a finance major) talk about Greenspan and Bernanke fucking things up. We've only got like ten years of college between us, but they still can't figure out why when the economy is running strong (too strong maybe), the Man raises the rates. Then after everything gets fucked up and the word "recession" is first heard, they drop the rate. Any reason they can't simply leave good enough alone?

Is it because Americans are fucking idiots when it comes to saving money?

That One Guy said...

Yeah - that's exactly it - we ARE morons about saving money - we've used our home equity as an ATM for a long time now, and it's time to pay the piper.

As far as rates, the things that ARE effected directly by the rate cuts are the short term HELD notes, like Home Equity Lines and Construction loans. Those are not typically sold as bonds on wall street, and they are DIRECTLY tied to Prime, as opposed the the LIBOR index.

And about rates vs economic growth - there are more factors than domestic economic growth that impact FED rate policy... one of the other major factors is how our dollar is performing against other foreign currencies - and that is TERRIBLE right now. (foreign investors basically FINANCE our national consumer debt.) If some of the big players lose faith in the ability of regular people to PAY THEIR BILLS and decide it's no longer a good investment, they begin to drop out of the dollars, and our dollar/economy will collapse on its face, like a defensive lineman running a fumble 90 yards to the end zone.

And that would suck.

That being said, there are those who think that a .50 rate cut was too much and sends a couple of signals:

1. Bernanke is a sophomoric scaredy-cat who can barely find his ass with both hands.

2. The FED thinks we're in deeper doo-doo than most economists.

I wonder which it really is.

OneHungMan said...

It seems the housing market, however inflated, has been carrying the economy for years now. The reasons can be discussed ad nauseam (and if OneHung recalls, you and he have on occasion), i.e. lenders are to blame because they shouldn't just give everyone a million dollar loan vs. consumers are to blame because they're not being held accountable.

Let's say the government (God forbid) or someone else got involved and actually studied the loan applications and made it harder to get a loan (for example, if you work at Subway, you probably can't afford an $800K house), would the Fed have to adjust the rate every quarter?

That One Guy said...

the problem is this - every time the government steps in to manage a free market sector, it's a fuster-cluck.

The mortgage market is ALREADY fixing itself, as shown by lenders going out of the risky subprime business BECAUSE NOBODY WILL BY THE LOANS. This is the type of regulation that is needed, not federal government.

It will fix itself, through market pressures.

The fed can then concentrate on the broader market economic indicators, including BOTH domestic AND foreign concerns.

Rate moves by the FED are a measured and complicated response to global pressure, not just mortgage rate pressure. When the dollar hits an historic LOW against the Euro, AND Gold futures hit a 30 year high, something is wrong with the balance, and a move needs to be made. There is debate over whether a .25 move, which the markets had already priced in, was enough, or whether the full .50 cut was too much, signaling a FED Chairman who is scared of his own shadow right now.


:)

That One Guy said...

That being said though, there was a bill passed yesterday or the day before regarding a (very long overdue) overhaul of the FHA housing lending programs.

I guess we'll see what happens there.

OneHungMan said...

OneHung agrees about the Gov't getting involved and fucking it all up. Thank God OHM is a CPA and the SEC realizes they aren't smart enough to regulate that industry, so they just yell at the AIPCA and tell them to fix it.

OHM was hoping some sort of regulatory agency could fix the lending industry.