FOR IMMEDIATE RELEASE:
In an ongoing effort to avoid economic recession the Federal Reserve first dropped interest rates in mid-January. During an unscheduled meeting, the Fed lowered its federal funds rate, which influences consumer loans such as retail credit card debt and auto loans. The discount rate -- which calculates the interest banks pay to borrow money from the Central Bank -- was also cut. Both rates were lowered by three-quarters of a point, the biggest single-day rate cut since October 1984. The historic decision to drastically drop rates was the first to happen between regularly scheduled meetings since a half-point cut that occurred September 12, 2001, the morning after the terrorist attacks.
Although mortgage interest rates are not directly tied to the fed funds or discount rate, they typically follow in tandem. Kicking off 2008 with cheap rates naturally gave borrowers plenty of reasons to cheer -- and to lock-in the newer rates while there was still time to grab them. But consumers who rushed to confirm their mortgage rates may have experienced some degree of remorse nine days later. The Fed convened once more -- for its regularly scheduled monthly meeting -- and voted to lop off another half of a point. Interest rates for some 30-year fixed mortgages have subsequently slipped under 5 ½ percent, while 15-year fixed rate mortgages can be found for less than 5 percent.
The federal funds rate was at 5.25 percent just four months ago. Now it is at three percent, and many economists expect to see it go even lower within the next few months. The move may help save hundreds of thousands of homeowners from imminent foreclosure by virtue of increased sales or through easier refinancing away from hazardous adjustable rate loans into fixed rate mortgages.
Meanwhile, the government’s deadline for mortgage lenders to rework troublesome adjustable rate loans scheduled to reset is fast approaching. Unless lenders independently come up with plans to resolve the crisis, officials in Washington say they will intervene with mandatory guidelines to help save homeowners from delinquency and foreclosure.
But there are other homeowners -- many with excellent credit histories -- who are not covered by those plans which exclusively target subprime mortgage holders. For example, the market for jumbo loans -- those for amounts above $417,000 -- is also in turmoil. Vast numbers of consumers who have adjustable rate jumbos are unable to refinance because the investors who normally fund those high dollar mortgages are afraid to participate in the current volatile jumbo arena. But the new economic stimulus package being crafted by Congress may bring relief to those homeowners.
Many in Congress are hopeful that the stimulus package will include a proposal to let Fannie Mae and Freddie Mac temporarily finance jumbo loans, since the two agencies are currently prohibited from dealing in any loans of that magnitude. According the National Association of Realtors, getting Fannie Mae and Freddie Mac into the jumbo lending game will not only provide much-needed loan liquidity but could actually prevent as many as 140,000 foreclosures.
All this is fantastic news for homeowners wanting to refinance, buyers needing new loans, and sellers needing qualified buyers. Those interested in more affordable monthly payments have a rare opportunity to buy, refinance, or take out a home equity loan or line of credit at fire sale prices. Hurry, though, because this “blue light special” may not last much longer.
Then again, the Fed could have more surprises in store and continue to make cuts as it did in 2001. Back then rates were whittled all the way down to one percentage point.
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