The Federal Reserve cut both the discount rate and federal funds rate a full .5% yesterday. This surprised us because we thought Ben Bernanke would be more judicious in his approach to easing money.
I guess you can’t please everybody. Pundits pleaded with Gentle Ben to aggressively cut to avoid a recession. Ben gave them what they wanted and now they think he overreached. Today, in a 180 degree turn, the markets are concerned about the prospect of inflation. Treasury yields rose over .5% this morning while mortgage bonds seem to be flat. It won’t be long before the effect of this cut is seen in higher mortgage rates. This conundrum is what we’ve been concerned about so we are maintaining our recommendation to lock-in all loans at application.
Are you confused? How can the Fed cut rates and mortgage rates rise? Markets are discounting mechanisms, continually taking into account the possibility of future events. Bond traders have turned into riverboat gamblers, constantly trying to outguess the Fed. We believe that the risk of higher rates outweighs the reward of waiting to see if you can get JUST A LITTLE lower rate.
In more positive news, the Office of Federal Housing Enterprise Oversight (OFHEO) allowed Fannie Mae and Freddie Mac to buy more loans. This may pave the way for higher lending limits next year. We think that the conforming loan limits may be increased to a level that is closer to the $500,000 mark for 2008. This would be a welcome move in states like California and New York where jumbo loans are the rule rather than the exception.
Rates for Wednesday, September 17, 2007:
Program Rate APR
Annual ARM 5.625% 5.693%
3/1 ARM 6.000% 6.070%
5/1 ARM 6.125% 6.217%
30 Year Fixed 6.125% 6.217%
Rates subject to qualification and market conditions. Equal Opportunity Lender.