The Fed Lowers Rates

Today the Federal Reserve lowered short-term interest rates, the Fed Funds Rate, by 3/4%.

Here is some of what they said in their policy statement--

· The risk of inflation has decreased appreciably.
· The Fed will continue buying large quantities of mortgage backed securities or MBSs and will expands its purchase of MBS if needed.
· Weak economic conditions are likely to warrant exceptionally low Fed Funds Rate for some time.
· Going forward the Fed’s focus will be to support the functioning of the financial markets and to stimulate the economy. (No mention of their mandate about containing inflation.)

Here is what I think we will see happen--

* We will probably see the Fed Funds Rate at 2% or lower throughout 2009.

· It appears that the Fed is committed to keeping mortgage rates super low. How low? I don’t know for sure. I would assume with 99% certainty a rate below 5.50% and with 60% certainty rates below 5%.

· For how long? I could see this being the case for 6 to 9 months maybe. Why? Fewer people normally buy a home in the dead of winter and we are 4 months away from the peak buying and selling season. Or until housing sales rebound nicely nationwide.

Mortgage Rates at 4.50%???

On Wednesday afternoon it was announced that the Treasury is considering a plan to lower mortgage rates to 4.50% to stimulate the housing market and our economy. And this was widely reported by the media as I have received several calls on Thursday and Friday about this.

How would they do this? It appears that the Treasury is considering buying more Mortgage Backed Securities from Fannie, Freddie, and Ginnie and financing these purchases by issuing new Treasury debt, probably 10 year T-bills which are currently yielding under 3%. Thus, creating a spread and making money just like a bank does. How I love the power of Arbitrage!

Personally, I believe the Treasury could accomplish this by saying just 1 additional word—explicit. If Hank Paulson and Ben Bernanke would just say that the Treasury “explicitly” guarantees the MBS’ of Fannie and Freddie, mortgage rates would tumble without 1 penny spent. But, I don’t know any politician who knows how to do anything without spending money. Ugh!

What Makes Me Scream!

Nothing makes me scream louder than Mortgage Professionals telling people that mortgage rates are tied or linked to the 10 Year Treasury Bill. Plus hundreds of "Talking Heads" in the media believe and say this as well.

NO THEY ARE NOT!!!!!!!!!!!!!!!

The last 2 days of trading make my point as the 10 Year Treasury Bill is up over 400 basis points in price as the yield has plummeted over 1/2% to 3.01%. On Thursday, the 30 Year Treasury Bond's yield or rate dropped .64%.

But, in the last 2 days the 6.00% Fannie Mae 30 year bond has gained a grand total of 11 basis points in price!!! And mortgage rates have remain unchanged. You see mortgage rates are directly correlated with the sale of mortgage bonds and nothing else.

If your Mortgage Professional ever says that mortgage rates are tied or linked to the 10 Year Treasury Bill, please please tell them that they are wrong. Then, hire a Mortgage Professional who knows the TRUTH and can advise you the best.

Posted on November 21, 2008