Is the Federal Reserve Going to Cut?

ON THE OTHER HAND if the Federal Reserve doesn't cut, and they appear reluctant to cut, there could be a sell off in both the stock and bond markets forcing rates higher. This will affect both conforming rates and most likely jumbos. There is precedent for this to happen as well. Chairman Bernanke has stated often that he wishes to take action to help the economy, not an industry. He feels that helping an industry undermines the independence of the Fed. (Writers note: He also is worried that if he lowers rates and it helps the mortgage backs recover that it could hurt the hedge funds who are believed to be shorting the mortgage backs at this time. They are betting the mortgage backs won't recover and the hedge funds will make money as the rates go up and the price of the instruments go down. This rumor has been heard on Wall Street and I am inclined to believe it.)

With those two scenarios what is a borrower to do? Good question!. First of all there are really pretty good rates in the conforming arena as I am writing this. The 15 year fixed, 20 year fixed and 30 year fixed are in the high 5% range, and low 6% range for the latter two loans without points. Jumbo fixed rates are in the 7% range but jumbo arms, fixed for 5, 7 or 10 years are in the middle to high 6% range up to two or three million dollars without points for some and less than one point for others. (Note: it depends on the loan to value, credit score, which state the property is located, type of loan, etc.)

Here is the bottom line. You can bet one way about the cutting of the Federal Reserve's Federal Funds rate and be right and still lose. In as much as the real problem in the mortgage arena is liquidity and the ability to sell the mortgage back securities on Wall Street, the cut will do little to relieve that but give a signal of help from the Fed. Will it be enough to make rates go back to the normalcy we have come to expect in the mortgage market. It's anyone's guess.

I would prefer to see Fannie Mae and Freddie Mac raise their loan limits to take the pressure off the credit markets. Fannie and Freddie have the liquidity as Government Sponsored Enterprises and long decent reputations to make it work. The idea that Hawaii and Alaska ($625,000 conforming limit for single family residences) are the only high cost areas in the United States is ludicrous. Both coasts should be considered high costs areas for no other reason than they are.

You have now seen my thoughts on the upcoming event or non-event. You are the one who needs to act and who has to decide for yourself what you think will happen . I certainly can't tell you that my guess is any better than yours, although I may (or might) know more about the subject than you.

Good luck!