Bobby Samson

Below is an article I thought was interesting...

The Federal Reserve has cut interest rates six straight times since September 2007. Most analysts are predicting that the Fed will cut rates even further when it meets at the end of this month. And yet, despite a full 3% in interest rate cuts during this time, mortgage rates are significantly higher now than they were just three months ago. How is that possible? Don't rate cuts equal lower mortgage rates? Read on as the team at YOU Magazine goes behind the headlines to show you how these Fed cuts do and don't affect your mortgage.

Here's the straight story: Mortgage interest rates are dictated by one thing and one thing only - the performance of mortgage-backed securities. Despite what you may have heard in the media, interest rate cuts from the Federal Reserve have no direct effect on long-term mortgage rates.

The True Role of the Federal Reserve
The Federal Reserve, our nation's central banking system, was put in place to help avoid major financial collapses like the Depression. The Fed has two specific duties: to keep inflation in check and regulate the nation's financial institutions. And while it has some regulatory power over how the mortgage industry operates, in its 95-year history, the Federal Reserve has never once set or reset mortgage interest rates. It simply has no authority to do so.

But, to control inflation, the Fed has several tools at its disposal, including the ability to adjust the Discount Rate and the Fed Funds Rate, which are very different from mortgage interest rates. By increasing or decreasing these interest rates, the Fed can manage inflation and economic growth according to its financial policy. While movement in these interest rates does affect the Prime Interest Rate - which directly affect things like credit cards, home equity lines of credit (HELOCs), and adjustable-rate mortgages - long-term mortgage rates do not always follow suit.

In the following chart, mortgage rates are shown to have actually increased from March 2007 to March 2008, even though the Federal Reserve cut interests rates six consecutive times, slashing three full percentage points in the process.

What Really Moves Mortgage Rates?
Mortgage rates are set daily by individual lending institutions and are based solely on the trading activity of mortgage-backed securities (MBS), a type of bond that investors trade daily.

Without getting too technical, MBS are bonds that represent mortgages currently in place. For instance, let's say you have a 30-year fixed rate mortgage of $200,000 at an interest rate of 6%. That loan isn't worth anything right now, but over a 30-year period, it represents a profit of 6% or up to $12,000 every year for the bank that owns the loan, provided you make all of your payments.

However, instead of waiting 30 years to collect on that profit, your loan is "sold" to a bank where it is bundled together with other similar loans. It's like winning the lottery and choosing the cash value prize instead of accepting full payments that are spread over 20 years. Of course, you get less money than the total value of the prize if you choose the cash upfront, but you don't have to wait twenty years to collect it all.

This group of bundled loans then, just like a public company, is split into smaller units or bonds and sold just like stocks in a company to investors. These bonds, secured or backed by the profits from the loans, are called mortgage-backed securities. And just like stocks, investors like you and me can buy and sell them every day.

And it's the performance of these specific bonds that lending institutions use to set mortgage rates.

The real dynamic at the heart of interest rate movement, then, is the complex relationship between stocks and bonds, supply and demand, inflation, news that moves markets, the economy, employment levels, political events, gross domestic product, and any number of other factors.

And while there exist a number of somewhat reliable economic indicators, if anyone tells you that he or she has the secret formula for predicting these movements exactly, it's just not true. There is no magic formula, no index, no rate cuts or Fed activities that work 100% of the time.

The best you can hope for is an experienced mortgage professional who truly understands mortgage-backed securities and how they trade. He or she can utilize specific market knowledge and experience to take advantage of daily fluctuations and lock in a rate that could save you thousands of dollars throughout the life of your loan.

If you're waiting for the Federal Reserve - or worse, the media - to create refinance or new home buying opportunities for you, don't count on it. Call an experienced mortgage professional and get the facts.

I wanted to let you know about a College Fair this Sunday, April 6th from 1-4 at the Dulles Expo Centre in Chantilly.

Bobby Samson NVAR Top Producer bobbysamson527@hotmail.com 703-862-4714 Samson Realty 14526 Lee Road Suite 100 Chantilly, VA 20151

"DARLING, I DON'T KNOW WHY I GO TO EXTREMES...TOO HIGH OR TOO LOW, THERE AIN'T NO IN-BETWEENS..." Billy Joel The financial markets endured another week of extreme bipolar behavior, with enormous intra-day mood swings that normally wouldn't be seen over the course of several weeks. While Bonds and home loan rates wildly rocketed higher and plummeted lower on a daily basis throughout the week, fixed home loan rates ended up improved by about .25% for the week overall. And last week...the action started unusually early, stemming from some almost unprecedented weekend actions by the Fed.

Last Sunday night, the news broke that the Fed had not only decided to make a move to lower the Discount Rate by .25%, just two days ahead of when their normally scheduled announcement would arrive, but also that they had helped facilitate the bailout of investment giant Bear Stearns. The 85-year-old company had its stock purchased by JPM Chase at $2 per share, for $236 Million...yep, that's Million with an M. Bear Stearns was trading near $90 at the end of February, with a 52-week high near $160. Bear Stearns was the number one buyer of sub-prime home loans, with a huge appetite for this type of paper - and they bought sub-prime transactions with both fists, a strategy that certainly came back to haunt them.

Adding to the manic-depressive mix was a huge news day on Tuesday, starting with earnings and outlook from two other major financial players - Goldman Sachs and Lehman Brothers - who reported much more positive results than had been anticipated. Particularly on the heels of the Bear Stearns situation, this was very welcome news to a jittery Stock market. New construction numbers came out mixed, along with a hotter than expected read on wholesale inflation via the Producer Price Index...and as if it all weren't enough already, the Fed released their official decision to cut the Fed Funds Rate by .75%. Many people expected a deeper cut, but they likely kept the cut to only .75% because of continuing fears of inflation.

But wait...there's still more. On Wednesday, investment banker Morgan Stanley also came out with a great earnings report, which again was seen as good news by the Stock market, but pulled money out of Bonds. But then...along came big news from the Office of Federal Housing Enterprise Oversight (OFHEO), who announced that they lifted special capital restrictions that had been put in place for both Fannie Mae and Freddie Mac. This will allow these firms to pump $200 Billion into the mortgage market by way of buying Mortgage Bonds. The anticipated increase in demand was very good news for Bonds and home loan rates, which immediately improved on the news.

Bobby Samson NVAR Top Producer bobbysamson527@hotmail.com 703-862-4714 Samson Realty 14526 Lee Road Suite 100 Chantilly, VA 20151