November 8, 2007

Is the Fed Really Helping Homeowners

Chairman Ben S. Bernanke speaks before the Joint Economic Committee, U.S. Congress on the economic outlook on November 8, 2007

Developments in Financial Markets

Chair of the Federal Reserve system spoke before Congress on Nov 8 to report on the state of the economy. I read the report and Here is a summary of what I got out of it.
1. Financial turmoil was triggered by investor concerns about the credit quality of mortgages, especially subprime mortgages with adjustable interest rates.
2. Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets.

Federal Reserve Policy Actions
1. August 17, the Federal Reserve Board cut the discount rate ( read short term rates, mortgages are long term rates) the rate at which it lends directly to banks--50 basis points, or 1/2 percentage point, and subsequently took several additional measures.
2. These efforts to provide liquidity appear to have been helpful on the whole, but the functioning of a number of important markets remained impaired.

The Risks
1. Financial market conditions would fail to improve or even worsen, causing credit conditions to become even more restrictive than expected
3. House prices might weaken more than expected, which could further reduce consumers' willingness to spend and increase investors' concerns about mortgage credit.
4. Financial market volatility and strains have persisted.
5. Sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity.

KEY: The FOMC will continue to carefully assess the implications for the outlook of the incoming economic data and financial market developments and will act as needed to foster price stability and sustainable economic growth. Note: Sounds like another cut in interest rates to me. But whats the impact? Where is the homeowners in this reduction. We know that credit card owners and home equity loans are the kind of debts that respond to short term reductions, but where is the help for the homeowner?

KEY: From Freddie Mac - the 30-year fixed-rate mortgage (FRM) averaged 6.24 percent, Last year at this time, the 30-year FRM averaged 6.33 percent. The 15-year FRM this week averaged 5.90 percent, A year ago, the 15-year FRM averaged 6.04 percent. Now, I have read that the variable mortgages will be readjusting for 3-5 years and that the average households annual mortgage increase will be $10,000. The long term rates are hardly affected by the .75% decrease already provided by the Fed. The total decline in rates from last year to this is not enough help. Can the Fed possibly think that .09% on the 30 year and .14% decrease on the 15 year mortgage rates will be enough to keep people in their homes and supply off the market? Im afraid as far as price and supply there is much more bad news to come, unless Congress steps up and significantly helps the home owner.

Thanks for Reading

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