Fed bold moves should keep rates low
March 20, 2009 by admin
This week the stock market has seen a nice rally and moved up sharply following Wednesdays FOMC meeting. The market was very receptive to the announcement from the Fed that they would be adding over one trillion dollars of liquidity to the market. The fed is trying to restore the credit markets and is willing to explore every avenue possible after lowering the discount rate down to .25% earlier this year, it was believed that they may be limited in their ability to influence the economy after lowering rates to such a low point, but Ben Bernanke remains committed to helping the economy recover.
The Fed made a few key announcements this week. They indicated they would be purchasing treasuries and have earmarked up to $300 billion for this and would be purchasing mortgage securities and have earmarked over $700 billion to this cause. Their agreement to purchase the mortgage securities (securitized by Fannie Mae or Freddie Mac) is the second move the fed has made to directly purchase these assets, following a move in December of 2008. The fed’s decision in January to purchase the mortgage backed loan securities help to bring mortgage rates down to historic lows and lead to a refinance boom for lenders. The historic low rates have helped millions of home owners to refinance their mortgages often at rates under five percent fixed for either fifteen or thirty year loan terms. The drop with rates did not have a direct boost in helping to improve home sales and this marketplace has not directly benefited from the historically low rates.
The feds bold move at influencing the price on consumer mortgage loans will likely keep fixed rate mortgage loans around five percent for the near future. Many industry experts believe that their is not likely to be a further drop with mortgage rates as lenders are simply going to try and leverage the extra margin they are now earning into extra profit. The challenge for the banking and lending industry is that the rapid drop in rates has helped to improve their volume of loans, but most lenders are now understaffed as they were forced to lay off workers in 2008 when their was less volume in the marketplace and they do not seem eager to re-staff these positions and would rather focus on improved profit margins and quality of loans versus sheer loan volume.
The feds moves this week also could help to free up capital for consumer loans and commercial lending. These two markets have been hit particularly hard over the past year as their is no secondary market that is buying these loans. The fed has attempted to free up this market through its TALF program, but the results have not been as immediate as their work in the mortgage industry.