Posted on September 16, 2011.
Today, Federal Reserve slashes benchmark interest rate to zero percent and 0.25 Between. What the heck Does That Mean? And How Come No Matter How Many Times the Fed slash The spleen, it barely affects The 15-year and 30-year mortgage interest rates? Does It Have Something To Do With The housing demand? The Housing Industry Is not In The pit now? How come the rats are not going down? Can anyone explain this to me in layman's language?
Thank you.
Leigh Alepin says...
The fed reserve rate is the rate at which it (and other banks) lend money to other banks via "ovn't loans." Theoretically interest rates are supposed to fall for mortgages but as you've seen, this hasn't really been happening. The reason for this is that virtually NO ONE is loaning out $$ to potential homebuyers during this credit crunch. Basically, banks are afraid to loan money. They're losing $$ hand over fist right now on people who foreclose due to non payment so the rate they charge has to compensate somewhat for the risk they're taking. Until the "Risk" factor disappears, the rates will continue to be in the 5-7% range - possibly higher. When the FED basically backed Fannie Mae/Freddie Mac's mortgages, the "risk" was substantially lowered and the rates fell from about 6.5% to 5.5%, pretty drastic.
So, while the latest rate lowers the federal funds rate to effectively 0.00 or 0.25%, it will do nothing for the mortgage market until people believe the "risk" factor is lowered too.
I would expect to see mortgage rates hover between 4.5-5.5% for the next few months and see how foreclosures do. If they start to drop, then interest rates will drop along with it.
Posted on September 18, 2011
