Why the Fed's rate cuts won't help you.

[babyblues]

American Capitalism at it's best. This is really starting to make me mad.


Why the Fed cuts won't help you - MSN Money

In its efforts to keep irresponsible bankers on Wall Street afloat, the Federal Reserve is spurring inflation, crippling the dollar and cutting into retirees' incomes. And mortgages and car loans won't get any cheaper.

But the Fed's effort will have little effect on the ability of the average American to get a cheap loan for a new home, car or college education even as it has a large effect on U.S. banks' ability to fix their balance sheets by racking up fat profits.

If that sounds unfair, welcome to the latest episode of a brutal new American business ethic, in which the government bails out bad bets by risk-taking banking executives in New York with money that it borrows from middle-class families and foreign investors. The effort is gilded with fancy financial language and cloaked in the guise of a rescue that helps all citizens, but the reality is that Washington is essentially robbing the poor to help the rich.

It seems odd, but these are extraordinary times. Normally, when the Federal Reserve cuts the rate at which it lends money to U.S. banks, those banks in turn cut the rates at which they lend money to citizens and companies for personal and commercial use. Simple enough. Yet in the past few months, banks have made three important changes in their usual practice:

They have not been passing all of their interest-rate savings to customers.

They have restricted lending only to most creditworthy, documented applicants.

They have cut the total amount they're willing to lend.

Banks are taking these seemingly perverse steps in an effort to reverse the effects of the massive losses they have withstood for lending too broadly to consumers and companies with lousy credit over the past five years.

They're pulling a big 180, which is as confusing as it is disheartening. Rather than providing funds to prospective home buyers and business people with legitimate needs for moving into larger homes or expanding factory lines, records show the banks are hoarding the low-cost money they're borrowing from the Fed and investing it in Treasury bonds paying higher interest yields. They're then pocketing the windfall profits to repair their own ravaged balance sheets.

As if that's not bad enough, the Fed's swiftly conceived, unprecedented course of action harms the public in three other ways:

- It boosts inflation by lifting the total number of dollars in circulation.
- It undercuts the attractiveness of the U.S. dollar, which leads to higher food, energy and gold prices.
- It cuts the yields of dividend-paying investments such as government bonds upon which retirees depend for steady income.

In other words, the Fed action helps imprudent bankers dig out of a hole by putting prudent citizens and foreigners in one. This gives big financial businesses a shot at staving off disaster at the risk of cutting the spending and earning power of everyone else.

To be fair, the Federal Reserve never wanted to be in this position, and it told Congress as recently as a few months ago that the U.S. economy was in such great shape that it had no intention of lowering interest rates in a material way anytime soon. But the Fed's leaders, a dangerous mix of university professors and career bureaucrats, were drawn into a trap at amazing speed by dark forces in the global financing system that they now admit they scarcely understood.

How could this happen? Albert Wojnilower, who was chief economist at Credit Suisse First Boston for a quarter of a century, observes that the history of finance is rife with examples of financiers who successfully outwit their referees -- the accountants, auditors, rating agencies, bank examiners and government agencies that are assigned to create and enforce rules.

Wojnilower, now an adviser to Craig Drill Capital in New York, points out that just as in sports, some of these officials may be corrupt, indifferent, incompetent, or even hostile to the rules themselves, but they always fall behind the financiers. He notes that as soon as lenders are freed of constraints -- as they were in this case by Bush administration officials eager to deregulate the industry -- they are spurred by huge short-term rewards "to compete addictively with one another in taking bigger and bigger risks.” Wojnilower says that eventually havoc breaks loose, forcing responsible government authorities to halt the chaos by providing bailouts to participants considered too big to fail.

It's a bit ironic, and not a little sad, that government has come to believe it has to fight fire with fire. The Fed, whose leaders are appointed by the president, is essentially trying to battle problems created in an era of overly cheap money and loose lending by making money even cheaper and lending even more aggressively.

In just the past few weeks, it has broken all of its own rules by providing hundreds of billions of taxpayer funds to brokerages at special auctions, opening a bigger "discount" window to permit a wider range of financial institutions to beg at the government till and accepting weaker-than-normal collateral such as iffy mortgage-backed securities. The Fed has put the government in the position of being the payday lender of last resort.

Just to top it all off, the Fed this week announced plans to allow the twin titans of government-supported mortgage finance, Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) -- which have proved themselves horrible at managing risk -- to make even bigger loans than they had previously. And it is telling banks to let individuals facing foreclosure to stretch out their payments a little longer.

It is all a bit crazy, which is why many veteran financial advisers recommend that investors remain skeptical of rallies.

The market rallied before today's Fed action, expecting a full percentage-point cut, and reacted well initially even to the less aggressive action. But what you want to watch is the reaction of debt markets, not the equity markets. Credit investors, who are the real masters of the global economic system, believe that the Fed is like a hamster in a cage that has to run faster just to stay in place as events spin faster and faster out of its control.

To have had a chance at getting ahead, by making money so cheap that lenders would have abandoned their policy of distrust toward borrowers, the Fed should have cut rates by 1.25 percentage points today. As the Fed's effort fell short, the hamster will likely just go back on the wheel.

[NewbieChris]

Originally Posted by babyblues

To have had a chance at getting ahead, by making money so cheap that lenders would have abandoned their policy of distrust toward borrowers, the Fed should have cut rates by 1.25 percentage points today. As the Fed's effort fell short, the hamster will likely just go back on the wheel.

A-men. The Fed is giving into moral hazard and really screwing over everyone. It is not fault of only the borrower either, if these lenders don't realize what they did was stupid and almost un-ethical they are as dumb as they are rich.

[Mr incredible]

its the sames all over, in the UK it used to be the case that you could predict what your homeloan would be from the base rate set by the Bank of England, i.e if the base rate was 5.5% you would be able to get your homeloan in tracker form at like 6.5% or less but certainly no more that 1% over base.

Thats blown out of the window now, even thou they are reducing the base rate the mortgage rates arn't coming doiwn that quick

[Shibby]

I tried to read that but it's all very confusing.

[SonofBone]

enlightening and sad. I've been wondering why in the hell the mortgage rates aren't going down.

[redsquirrel]

Originally Posted by SonofBone

enlightening and sad. I've been wondering why in the hell the mortgage rates aren't going down.

Even if the Federal government wasn't screwing over the majority of it's citizens w/ the reduction in the Fed funds rate ,& the Federal Reserve's recent injection of $200B for banks to utilize, it STILL wouldn't lower mortgage rates.

It is a misconception to society that just because the Fed lowers rates, that means mortgage rates should fall as well. What people don't realize, is that when the Fed funds rate is lowered, that it has no impact on mortgages. It doesn't directly effect it. All it means is that banks pay less interest on the money they borrow. It really is supposed to effect credit card & car loan rates.

The main reason mortgage rates aren't going down is partly because of what's mentioned above. These banks have lost their asses, and those that didn't close down, need these funds to try and recover in order to stay afloat. Rates actually have gone down slightly, so some of this is being passed onto consumers, just not as much as expected. Every time you close on a mortgage, there is an investor who actually bought the note and invests in it. Investors now are very cautious on who and what they are investing in. So, if there is no investor to buy your paper, you don't get the loan. But, on the flip side- if the investor doesn't even have any funds to have the OPTION to buy your paper, then no one is getting a mortgage

The second reason it's not impacting mortgages is, is because all of these fly by night lenders gave people these great loans w/ almost NO verification of employment or assets. And, it is harder now than ever to get a loan at all. Investors have learned their lessons. And, actually people with stellar credit are given reductions on interest rates. People with not so great credit do pay higher rates. That's how it should've been. But so many co panies got so fuckin greedy, they've totally screwed it up for people in the future.

So, while although everyone isn't seeing an immediate impact on rates in their own lives, the injection by the Fed WILL make it better in about 6-12 months.

[ROCKETW19]

RED you must be in the home loan bussiness. Cuzz what you are sayin is so true, Im goin threw it right now. In the past if I wanted a Car or something I would just go in say I make some crazy amount per year and my great credit would get me any car I wanted. I have even re-fied and bought new houses with the same approach "stated loans"
Now all outta the blues Im tryin to by another house and getting a first is no big deal but I dont have 200K to put down and no one is givin up seconds. Very Very different than what im used to and a bit frustrating.

[SonofBone]

From a personal standpoint, I just would like to see more activity because I have a home on the market for sale and lowering the rates would bring more buyers into the picture.

Also, I understand what you're saying about the banks screwing up and now everybody else has to pay. It would be nice if they could make a little bit more money on making legitimate loans where someone's revenue has been verified and drop the rates vs. investing in t-bonds or whatever the hell they're investing in.

Who get's all of the closing cost money? Does that go to the title companies...banks get no portion of that? I have no idea...just curious.

[redsquirrel]

Originally Posted by ROCKETW19

RED you must be in the home loan bussiness. Cuzz what you are sayin is so true, Im goin threw it right now. In the past if I wanted a Car or something I would just go in say I make some crazy amount per year and my great credit would get me any car I wanted. I have even re-fied and bought new houses with the same approach "stated loans"
Now all outta the blues Im tryin to by another house and getting a first is no big deal but I dont have 200K to put down and no one is givin up seconds. Very Very different than what im used to and a bit frustrating.

You are exactly right. 5 years ago you could walk into your local credit union, and get a loan with MAYBE just a paystub. And yes, I'm an Operations Mgr with one of the largest lenders in the country. And the masses typically associate the Fed funds rate w/ mortgage rates.

Lending laws have really been restricted in the past 6 months. I've seen minimum credit score requirements go from 580 to 660. As for these "stated" types of loans, it is harder. Mainly because during the refi boom, all of these brokers severely overstated people's income to get the loan to work. So, if you want to blame anybody- blame them. That's who ruined it all. In all honesty, you can still get a "stated" loan, but more verification of your credit income & assets is required. You can't state on an application that a doctor who makes $170k/yr, only has $5k in his 401k. Just doesn't make sense.That truly is the core of the situation we are in right now. I mean, I've seen loan applications come through that "state" a nurse makes over $100k.

If you don't have a ton of money to put down, you may want to try to do an FHA loan. Those typically have higher loan to value limits than regular Conforming.

[redsquirrel]

Originally Posted by SonofBone

From a personal standpoint, I just would like to see more activity because I have a home on the market for sale and lowering the rates would bring more buyers into the picture.

Also, I understand what you're saying about the banks screwing up and now everybody else has to pay. It would be nice if they could make a little bit more money on making legitimate loans where someone's revenue has been verified and drop the rates vs. investing in t-bonds or whatever the hell they're investing in.

Who get's all of the closing cost money? Does that go to the title companies...banks get no portion of that? I have no idea...just curious.

Well, it's already a buyer's market as far as home sales are concerned because the market is saturated with homes for sale; so home prices are very low. If you drop mortgage rates even more, and make it that much easier for someone to get a loan, then that negates the purpose of trying to turn around the housing market. This just saturates the market even more.

As for closing costs- it really depends on who you go through. If you decide to pay points on your loan, that is added in your closing costs. (1% of your loan amount = 1 point on your loan). Some banks or brokers also indicate an "origination fee" which many times is just a cover for paying points. Some banks have underwritng & processing fees, which DO go to the bank. That's just the cost of doing business, as there are so many people involved in getting just one loan funded. As for the prepaid interest, title & escrow fees- no, the banks do not get that money.

Prepaid interest is the interest required until your 1st payment since every mortgage payment you make goes for the previous month's interest. Title fees go to the title company. That's what they charge to make sure you have no other liens against your home, close your loan, and record your new deed w/ the county recorder. Escrow reserves are required if you want to have your propety taxes & insurance paid by your mortgage company, instead of taking care of it on your own. Some say "Why would I add more money to my loan for money that basically goes into a savings account but doesn't earn interest??" ANSWER: most people don't have the discipline to set aside the additional money every month so they can pay them when the time comes.

[SonofBone]

thanks.

A couple of thoughts...

while I agree it is a buyer's market, luckily, prices are still increasing in the Austin area...just fewer buyers than last year.

Another thing that irritates me...I reached the 20% down on my loan & wanted to remove the PMI and also wanted to handle my own escrow as you mentioned. However, countrywide wanted me to get an appraisal or COV to do both. I could sorta understand for the PMI, but I didn't feel I should have to spend the money for a COV in order to handle my own escrow. I felt like it was just another hurdle to have to clear to prevent them from making money w/my money. I'll remember it in the future too when I have the upperhand.

[NewbieChris]

I don't understand what the problem is. What the fed is doing WILL help the economy. The idea isn't to lower rates (mortgages, cc, whatever, student loans), that is NEVER the idea. The idea is to get lenders to buy paper like you said. Our current situation is a much a fault of irresponsible borrowing as it is the fault of those that were willing to take on the risky borrowers. All you have to do is look at these balance sheets to see that these companies are hurting. Bear Sterns is almost dead, and it survived the Great Depression. Without companies like these the world does not turn. I don't understand the problem. For now it would be stupid for companies not to try and reign in who they lend to. When things calm down, then we can talk about how evil they are.

For now, lets be happy they exist.

So, how does this not help us?

[redsquirrel]

Originally Posted by NewbieChris

I
So, how does this not help us?

Well, I think what many people think is that there would be a positive impact almost immediately based on the drop in the Fed fund's rates. I just don't think people truly understand the capacity of these decisions.

This will help the economy in the future, I agree. I think most people are just expecting some sort of instant gratification.

[redsquirrel]

Originally Posted by SonofBone

thanks.

A couple of thoughts...

while I agree it is a buyer's market, luckily, prices are still increasing in the Austin area...just fewer buyers than last year.

Another thing that irritates me...I reached the 20% down on my loan & wanted to remove the PMI and also wanted to handle my own escrow as you mentioned. However, countrywide wanted me to get an appraisal or COV to do both. I could sorta understand for the PMI, but I didn't feel I should have to spend the money for a COV in order to handle my own escrow. I felt like it was just another hurdle to have to clear to prevent them from making money w/my money. I'll remember it in the future too when I have the upperhand.

In the middle parts of the country, yes values have increased slightly. But, small increase in values really has little to do with it being a total buyers market. When you make loans available to more people by lowering the rates, it could make the situation worse in the short term.

Now, as far as removing your PMI- that's pretty standard for any lender to require an appraisal. And, depending on your loan, you may not be able to remove escrows until you are in fact at 80%. What is a COV? You can usually get an appraisal for around $350. Depending on what your PMI payment is every month, it might be worth it. You also can look on your amortization schedule. It's pretty standard for PMI to automatically come off afer 60 months

[SonofBone]

A COV is a certificate of value. It is basically a watered down version of an appraisal. I believe they can essentially do it curbside based on the exterior appearance and comp information. It cost ~150.

Last year I hit the 20% amt or so I thought, but it was 20% w/closing costs included. They true definition of 20% was on my actual home price and I didn't hit until Oct/Nov time frame. Anyway, my house went under a contingency contract in November, so I figured the buyer's home would be sold before I would've actually recouped the cost of the COV...guess I was wrong...lol.

Got news today that my buyer is working on a lease to buy agreement on their home & will finalize w/me in the next day or two. I'll believe it when I see it. They wisely renogiated w/me. In November I gave them a price if they would purchase then vs. waiting until their home sold. We've now agreed to split that difference which I'm cool with because buyer's aren't exactly tearing down my door.

[FrankTheTank55]

Originally Posted by SonofBone

From a personal standpoint, I just would like to see more activity because I have a home on the market for sale and lowering the rates would bring more buyers into the picture.

I Had my house on the market for two years. I had it listed for $15,000 under what I owed on it and still couldnt sell it. So I am renting it out. Which works out pretty good because the renter basically pays my house payment on that house. Then I bought the new house for a great price. You might want to think about renting it out and then down the road either sell it when the market turns around or keep it as a rental and one day make a profit off it.

[redsquirrel]

Originally Posted by SonofBone

A COV is a certificate of value. It is basically a watered down version of an appraisal. I believe they can essentially do it curbside based on the exterior appearance and comp information. It cost ~150.

Yes, they can do an "Exterior Only", or Drive By appraisal, but $150 sounds a little light. Those are normally $250. But, if you're possibly getting a finalized contract, then don't waste your money. However- make sure that your home will appraise out:

Purchases used to be a sure thing as far as values are concerned. However, just in the past 2 days I've had 2 purchases that the values have come in LESS than the purchase price. And one of them was a new construction loft type of home, of which we included the builder's contract listing out the cost of every option, etc. Again this all relates to supply and demand- there's too much of a supply of homes right now, along with homes in foreclosure, or like Frank said he couldn't even sell his at all for $15k UNDER what he owed.

[SonofBone]

Originally Posted by redsquirrel

However- make sure that your home will appraise out:

Hopefully, I'll be good to go. My price is above the 2004 appraisal that was done when I bought it, but a fair deal under what zillow shows the current estimate to be. Zillow probably isn't the best gauge, but at the same time, I don't think my realtor would allow me to list it at too high of a price. I believe their game is listing low and making things happen. Reducing the sales price by 5 to 10K or whatever number isn't an issue to them when you're talking 5 or 6% commission.

In terms of renting, I hope I don't have to go there. I think it is a good option if you're close by or comfortable with it. I'm most likely going to be in another state next year. I just don't feel comfortable in renting something when I won't be that close and don't want to always be reminded of that other property that I owe on in another state.

My wife's home is 2 years old and we're anticipating taking a big hit on it when we move. She is fine w/doing so as she looks at it like she could've lost as much in 3 years paying rent while she is here. I guess when you have that outlook it isn't bad. The main thing will be moving it as it doesn't pay to chase bad money with good money. We'll just cut and hopefully minimize our losses and be done.

[babyblues]

Originally Posted by NewbieChris

I don't understand what the problem is. What the fed is doing WILL help the economy. The idea isn't to lower rates (mortgages, cc, whatever, student loans), that is NEVER the idea. The idea is to get lenders to buy paper like you said. Our current situation is a much a fault of irresponsible borrowing as it is the fault of those that were willing to take on the risky borrowers. All you have to do is look at these balance sheets to see that these companies are hurting. Bear Sterns is almost dead, and it survived the Great Depression. Without companies like these the world does not turn. I don't understand the problem. For now it would be stupid for companies not to try and reign in who they lend to. When things calm down, then we can talk about how evil they are.

For now, lets be happy they exist.

So, how does this not help us?

Well, I for one, am sick of all this talk about helping the economy while people are getting screwed. There has to be a better way. Help the economy, great, I'm all for it. But don't forget the little guy. I don't know, I just don't like it.

The problem is that the Fed is basically bailing out banks who have been greedy and irresponsible. You can't blame the borrowers or the mortgage companies. How can you blame people with bad credit for still wanting a chance at pursuing the American dream? These people saw a chance to own a home where no chance existed before and they took it. If a bank is willing to loan you money to buy a home when no one else will, what moron wouldn't take it? The payments for these variable rate mortgages have ballooned and borrowers are defaulting. Now, people are losing their homes, their credit is screwed up for life and mortgage companies are going out of business. But, surprise, surprise, look who's still afloat. The freakin banks. These are the same banks that were lending people money when they knew damn well they shouldn't. Where's the accountability? Well, our current administration, in it's infinite wisdom, decided that it was necessary to deregulate the industry. I don't know whether they really believed that it doesn't need to be regulated or they're too lazy to do it, but the pooch has been screwed nonetheless. True, we need the banks, but long is our government going to pass all of that loss onto us to rescue them?

It doesn't matter anyway. We're all a bunch of fat sows gorging ourselves on this country's prosperity and now that the gravy train has slowed, we're squealing and paniced. But when it starts again, we'll go right back to gorging ourselves and do it all over again. We cause our own problems.

I was listening to NPR the other day and this guy was saying how supply and demand problems don't account for oil going over $100 a barrel. Maybe $90, but not over $100. He said that with the stock market struggling, all these funds are looking for somewhere to invest their hundreds of millions of dollars. Well, low and behold, where do you think they've started investing in mass? Yep, oil stocks. That's what's pushed the price of oil so blasted high recently. How do you like that? We're doing it to ourselves. It really doesn't take long for the greedy to screw up a good thing for everyone else.