Lori O'Day

The Federal Funds Rate is a short-term rate and its function is to make money more or less costly to borrow for homeowners and business owners depending on the economic environment at the time. Like the Federal Discount Rate, the Fed Funds Rate is used to control the supply of available funds and hence, inflation and other interest rates. Lowering the rate makes it less expensive to borrow and vice versa. A Fed cut increases the supply of available money which in turn decreases short-term interest rates and typically will help ignite a boost to the overall economy. Supply and Demand 101! The Prime Rate will be impacted along with Home Equity Lines of Credit, some credit cards, auto loans and business loans; but a direct correlation does not exist with mortgage rates.

A look at the 11 Fed cuts in 2001 showed that mortgage bond prices deteriorated after each rate cut, meaning mortgage rates rose. The consumers who were expecting rates to drop were in for a surprise.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30 years, a rate that is set by the Fed can change from one day to another.

Another common mistake is in thinking that the 30-year Treasury bonds or 10-year Treasury notes are directly pegged to mortgage rates. Those are government securities that are backed by the full faith and credit of the U.S. government and have no direct effect on mortgage rates.

So what are mortgage rates based on? As it turns out, the answer is...mortgage-backed bonds known as Mortgage Backed Securities (MBS), a global exchange similar to the New York Stock Exchange and NASDAQ and traded everyday.

Mortgage-backed bonds are considered long-term products and pricing is based on long-term expectations of the U.S. economy and the U.S. dollar. Bonds issued by Fannie Mae and Freddie Mac (MBS) and the trading performance of those bonds will determine the direction of mortgage rates. Finding the catalyst that causes mortgage bonds to move will give you the key to finding out what makes mortgage rates rise or fall. We already know that inflation will always be a negative for any long-term bond because it eats away at the future returns. Since the bond will pay a set amount over a long period of time, that amount will be less valuable if inflation is high.

In closing, containing inflation and creating economic growth are the main objectives of the Federal Reserve and the reasons why they choose to manipulate the Fed Funds Rate. The reason for the last cut was an attempt to spark the economy and jump-start it from the slowdown we have been experiencing. More importantly, they are trying to keep us from entering the "textbook definition" of a recession.

Source:
Richelle Lynch
Bear Stearns

FOR MORE INFORMATION, PLEASE CONTACT SCOTT DAVIS, SUNTRUST MORTGAGE, 703-209-3138 or SCOTT.DAVIS@SUNTRUST.COM

What is the difference between a short sale and a foreclosure? Do you know?

In a nutshell, a short sale involves an owner who may be about ready to lose his house through foreclosure. He works out a debt settlement agreement with his lender, ie repaying 90% of the debt in lieu of foreclosure AND in lieu of the owner repaying 100% of the balance owed. Foreclosure is the name of the process in which the bank "reposesses" your house when you have defaulted on your mortgage. After your house has been foreclosed upon, it is considered an REO property - real estate owned by the bank.

When you are searching for a property to purchase, you can often expect some great delays when submitting an offer on a short sale. This is often caused when there is more than one lein on a property: a mortgage is a lein or debt against the house. Leins are satisfied in turn, meaning, the sale of a house pays the first trust then the second then the third and so on - this is why the entire purchase of a short sale can be such a lengthy process... with a property owner and perhaps multiple banks involved, agreeing on a contract offer can take a while!!

A foreclosure is usually a faster process since there is one entity involved with making a contract offer decision: the bank.

For more detailed information:

FENDING OFF FORECLOSURE

HOW TO DO A SHORT SALE

With the daily impacts we make on our planet and environment, there us a HUGE movement to make our homes more "green". The following article on WWW.TREEHUGGER.COM will give you plenty of food for thought!!

http://www.treehugger.com/files/2006/11/how_to_green_yo_5.php

Whether buying or selling a property, energy efficiency is very important. Please visit www.ENERGYSTAR.gov for some fantastic project ideas which will help to make your property more efficient. For example, for a list of common existing home problems, such as high energy bills, mold and mildew, or excessive dust, click HERE for suggested remedies. If you are in the market for a NEW home and are wondering what makes a home qualify for the ENERGY STAR ratings, click HERE. Also, you can visit HERE to get a list of ENERGY STAR quality builders! Just scroll down to the bottom of the page.

Is your home as efficient as it could be?