Fed Discount Cut; What does it mean for you?

by benborden

Over the last few weeks there has been a lot of action from the Federal Reserve. First the Federal Reserve implemented two cash infusions into the market and very unexpectedly cut the Fed Discount Rate. Its important to understand what led up to this and I will put into perspective what all this means.

Market movement
Over the last 4 months over 100 mortgage companies have shutdown due to illliquidty in the market. Because of this anyone with a “non conforming” loan, a loan that is not saleable to Fannie Mae, have limited and expensive options. Adding fuel to the fire is the media, saying that borrowers can not get a loan with out 20% down and this is simply not the case. Matter of fact there has been very little tightening in the “conforming” side of lending, meaning anything saleable to Fannie Mae or Freddie Mac. Matter of fact these rates are actually in a significant down trend over the last few weeks. With this said, it is most definitely not a time for home buyers, home sellers or anyone looking for a mortgage to be complacent. Programs and guidelines are going away or at best becoming more restrictive every day. Borrowers need to act quickly and decisively securing their loan options. The only loan that is protected is a closed loan.

What did the Fed do?
Getting back to the discount rate. The Discount Rate is the rate charged by the Federal Reserve, actually charged by one of the 12 Regional Fed Banks such as Richmond, Dallas, San Francisco etc, to commercial banks as the commercial banks borrow funds to make loans. This should not be confused with the Fed Funds Rate which impacts your interest rates on credit cards, car loans and home equity lines and loans. They are two seperate rates. The Feds decision to cut this rate increases liquidity and stability within the banking system. More importantly, the Fed is extending the borrowing period from overnight to 30 days, which could allow some lenders to use the discount window for loan fundings prior to sale in the secondary market.

How does this provide stability? The best analogy would be, suppose you had a car accident and you have a “short term” need to pay to have it repaired until you were reimbursed from your insurance company? Would you cash in your IRA or 401k or utilize the Equity Line on your home? Utilize the Home Equity Line on your home. You would not liquidate a long term investment for a short term need right? So the Discount Rate works much the same way.

Its also important to understand, this rate reduction has no impact on the mortgage rates for home loans.

What should you do now?
The old saying “knowledge is power” and is immensely true right now. Utilizing an expert that understands and can correctly disseminate the propaganda is crucial for a borrower to make an educated and timely decision. If you are in the market for financing I encourage you to seek out a skilled mortgage professional. One place to start your search is finding a CMPS. A CMPS is properly trained in “understanding” the current market and can properly and correctly advise you on the correct course to take. You can find a local CMPS graduate in your area here.

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