Posts from — September 2007

Well it finally happened, the federal reserve lowered interest rates. Its been my belief all year that the Federal Reserve would lower rates in the fall. Now that it has happened its important for consumers to understand what this Fed Rate Cut means to you and your mortgage.

First, for those that have a 30 year fixed rate mortgage it basically means nothing. The lower Fed Funds Rate DOES NOT mean that the 30 year fixed rate mortgage will go down. Actually, the 30 year can go higher as this chart illustrates. By December 2001, following 4.25% in cuts throughout the year, the 30 year mortgage was actually up to 7.07%.

Additionally, with the September 18th Fed cut the average 30 year fixed rate mortgage responded by increasing 5 basis points last week after the announcement. The chart above shows from the year 2001 to mid 20007, the 30 year fixed rate stayed relatively flat and has been predominately trading in a range of 5.875% to 6.25% since the spring of 2002.

But those that have short term adjustable rates, I myself having a monthly adjustable, may very well reap the rewards over the coming months and years if this rate reduction continues. You will notice by the two charts below, that the LIBOR rates, 1YR CMT and 11th District COFI have dropped nearly in tandem with the Federal Funds rate reduction. The LIBOR dropped from 7% in 2001 down to 1% not long after.

Fed Funds Rate since 1990:

Chart of LIBOR, CMT and COFI Indices since 1990:

The coming Fed rate reduction is why I have been a big fan of short term adjustable loans for the whole year. Short term adjustable rates are tremendous mortgage planning tools in a declining interest rate environment. Where people may tend to get into trouble, they get these loans in a increasing rate environment which makes no sense. Why would anyone get a short term adjustable in a increasing rate environment? Does not make sense to me.

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President Bush announced a new Federal Housing Administration (FHA) initiative called FHA Secure to assist approximately 240,000 homeowners in refinancing out of adjustable rate mortgages and keep their homes. FHA Secure is a temporary program and all loan applications must be signed no later than December 31, 2008. With the new FHA Secure program homeowners with strong credit histories and have made all payments on time until their loan reset but are now in default will be eligible for refinancing.

“Many hard-working American families who were able to make their mortgage payments under the initial teaser terms of the exotic loan are now struggling to make ends meet because their rates have doubled or tripled,” said HUD Secretary Alphonso Jackson. “FHA Secure will bring stability to the housing market and give eligible families who were in good financial standing before their loans reset a chance to keep their homes.”

To qualify for FHASecure, eligible homeowners must meet the following five criteria:

1. A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset;
2. Interest rates must have or will reset between June 2005 and December 2009;
3. Three percent cash or equity in the home;
4. A sustained history of employment; and
5. Sufficient income to make the mortgage payment.

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