Wednesday, October 31, 2007

Will a Fed Rate Cut Affect Mortgage Rates?

From the Seattle Times:

“Wall Street has experienced many scares lately, from a global credit crunch to big mortgage-related losses for top banks, so it's fitting the Federal Reserve's latest decision on interest rates comes on Halloween.

Many investors hope for a treat, in the form of another rate cut, rather than a trick.

The hope is a lower target for the benchmark federal funds rate would prompt banks to cut rates on mortgages — a boon to homeowners with adjustable rates due to reset — as well as credit cards.”

From The Wall Street Journal:

“…mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note… Lenders typically set their base mortgage rate around two percentage points higher than the 10-year bond yield.”

From the Associated Press:

"’The problems in the housing market, the problems in the credit markets are not easily solved by the Fed cutting rates,’ said Steve East, chief economist for investment bank Friedman Billings, Ramsey & Co. in Arlington, Va., who sees the Fed making three quarter-point cuts by January and puts the odds of a recession in 2008 at 60 percent.

The thinking is that lenders can improve battered balance sheets if they have to pay less for money they borrow short-term while the rate they charge borrowers for long-term loans holds steady or moves higher. Yet analysts say problems in the credit markets extend beyond the benefits of small rate cuts.”

From the New York Post:

“When the Fed attempted to rescue the housing industry in August by cutting its funds rate and reducing the discount rate for the second time in a month, the financial markets became spooked and punished mortgage seekers.

According to BankRate.com, the average rate on an adjustable rate mortgage went up from 6.53 percent right before the latest round of Fed rate cuts to 6.64 percent soon afterwards.”

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