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Why The Fed Is Having Less Influence Over House Loan Interest Prices

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By : Ike Ani 29 or more times read

Submitted 2010-02-27 15:32:36

Within the past when the Federal Reserve cut the discount rate it translated into lower house loan interest prices for home buyers. This was a convenient way for the Federal Reserve to stimulate the economy throughout economic slowdowns. By making it easier for individuals to get loans a lot more cash was pushed into the economy.

But the recent low cost rate cuts have failed to have a similar effect. In truth the spread between house loan interest rates and also the low cost rate is the greatest in 20 years. Although the Fed has cut rates 3 time in 2008, going from 4.25 to 2.25, if we look at a house loan prices graph over exactly the same time period we have failed to see much of a change. Two explanations have been put forth to explain why our present situation differs from what we have seen within the past. The first explanation is that the banks are facing almost 200 billion in losses from their misplaced bets on subprime mortgages, and are sticking with high interest rates to offset some of these losses. The other explanation is that banks still see a downside in the real estate market and are attempting to limit their exposure.

Considering that the house loan industry is comprised of 1000's of people I doubt either from the views is completely accurate. Additionally, considered how short sighted the mortgage industry was in their foolish bets on subprime mortgages throughout the boom time I think partially the mortgage industry is merely reacting. Throughout the boom time the house loan business reacted by competing with each other to create a lot more and a lot more bizarre loan products to allow people with poor credit to receive loans, in order to gain marketplace share. Now the real estate market is performing poorly the mortgage industry is spooked and is reacting by limiting access to loans.

Is there a light at the end of this tunnel? It's hard to tell. The latest Fed cut from 3 to 2.25 received a positive response from the market as interest rates fell from 6.13 to 5.87 the following week. But its anyone's guess of whether this is really a temporary blip or a sign that the mortgage industry is comfortable with the current spread between mortgage interest rates and the Fed's discount rate. If the later may be the case future rate cuts ought to have a more favorable affect on pushing down house loan rates. While this won't cure the current woes within the actual estate market it should assist alleviate some from the problems.

One thing that does seem more likely is that if the actual estate market continues to suffer the Fed will continue to cut rates. The current Fed Ben Bernanke chairman gave a speech before the subprime crisis detailing out how the Fed failed to respond strongly enough during the events which led towards the great depression and seems determined to not make the same mistakes. In truth, in an unprecedented move the Fed injected over 200 billion in the credit markets last week its clear the Fed is committed to performing whatever it can to cure the credit/mortgage crisis. If the banks begin reacting to the rate cuts the Fed might be able to succeed in their mission to take a stronger role in preventing an economic recession.

Author Resource:- For more information on the above topic, check out my site The Lowest Mortgage Rate at http://www.thelowestmortgagerate.info

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<!DOCTYPE HTML PUBLIC '-//W3C//DTD HTML 4.01 Transitional//EN' 'http://www.w3.org/TR/html4/loose.dtd'>; <html><head><title>Article Stargate | Why The Fed Is Having Less Influence Over House Loan Interest Prices</title></head><body><h3>Why The Fed Is Having Less Influence Over House Loan Interest Prices</h3> By: Ike Ani Within the past when the Federal Reserve cut the discount rate it translated into lower house loan interest prices for home buyers. This was a convenient way for the Federal Reserve to stimulate the economy throughout economic slowdowns. By making it easier for individuals to get loans a lot more cash was pushed into the economy. But the recent low cost rate cuts have failed to have a similar effect. In truth the spread between house loan interest rates and also the low cost rate is the greatest in 20 years. Although the Fed has cut rates 3 time in 2008, going from 4.25 to 2.25, if we look at a house loan prices graph over exactly the same time period we have failed to see much of a change. Two explanations have been put forth to explain why our present situation differs from what we have seen within the past. The first explanation is that the banks are facing almost 200 billion in losses from their misplaced bets on subprime mortgages, and are sticking with high interest rates to offset some of these losses. The other explanation is that banks still see a downside in the real estate market and are attempting to limit their exposure. Considering that the house loan industry is comprised of 1000's of people I doubt either from the views is completely accurate. Additionally, considered how short sighted the mortgage industry was in their foolish bets on subprime mortgages throughout the boom time I think partially the mortgage industry is merely reacting. Throughout the boom time the house loan business reacted by competing with each other to create a lot more and a lot more bizarre loan products to allow people with poor credit to receive loans, in order to gain marketplace share. Now the real estate market is performing poorly the mortgage industry is spooked and is reacting by limiting access to loans. Is there a light at the end of this tunnel? It's hard to tell. The latest Fed cut from 3 to 2.25 received a positive response from the market as interest rates fell from 6.13 to 5.87 the following week. But its anyone's guess of whether this is really a temporary blip or a sign that the mortgage industry is comfortable with the current spread between mortgage interest rates and the Fed's discount rate. If the later may be the case future rate cuts ought to have a more favorable affect on pushing down house loan rates. While this won't cure the current woes within the actual estate market it should assist alleviate some from the problems. One thing that does seem more likely is that if the actual estate market continues to suffer the Fed will continue to cut rates. The current Fed Ben Bernanke chairman gave a speech before the subprime crisis detailing out how the Fed failed to respond strongly enough during the events which led towards the great depression and seems determined to not make the same mistakes. In truth, in an unprecedented move the Fed injected over 200 billion in the credit markets last week its clear the Fed is committed to performing whatever it can to cure the credit/mortgage crisis. If the banks begin reacting to the rate cuts the Fed might be able to succeed in their mission to take a stronger role in preventing an economic recession. Author Resource:-> For more information on the above topic, check out my site <a href="http://www.thelowestmortgagerate.info/">The Lowest Mortgage Rate</a> at <a href="http://www.thelowestmortgagerate.info" target="_blank">http://www.thelowestmortgagerate.info</a> Article From <a href='http://article-stargate.com/'>Article Stargate</a> </body></html>

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