Bill Kamboukos

Why Federal Reserve Rate Cuts, Still Do Not Necessarily Mean Lower Interest Rates *Those of you who read these articles on a weekly basis may recognize the basis of this article from a similar one a little over six months ago. In the past week I have been contacted by quite a few individuals wondering if the Fed's latest cut will equal lower long term rates. My response to them has been that much has changed in the past few months and will continue as the Government continues to intervene and try and solve the issues the U.S. Economy and Housing Market is facing. However, one thing is constant and that is the Federal Reserve Rate Cuts do not necessarily mean lower interest rates. Let Me Explain. We have seen the Federal Reserve cut rates again, and again and again. Most recently with a .5% emergency cut last week. As a result, many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during recent five Fed rate cuts. In fact mortgage rates are now higher than they were before the Fed began cutting rates in January. This is difficult to explain to many consumers who have watched major rate cuts from the Fed with little benefit in mortgage rates. Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the 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 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). 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 keys to finding out what makes mortgage rates rise or fall. We 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. Over the past several years, one catalyst that seems to be working in the opposite direction of MBS prices is the Nasdaq and broader stock market. As bond prices rise, interest rates fall. As bond prices fall, interest rates rise. As the Nasdaq moves higher, bond prices move lower causing interest rates to rise. As the Nasdaq declines, mortgage bonds benefit, causing mortgage rates to fall. Additionally, and unlike common opinion, Fed rate cuts have had virtually no direct effect on mortgage rates. Moreover, it appears that since Fed rate cuts act to stimulate the Nasdaq, they have a negative effect on mortgage rates.

The bottom line is that it appears mortgage rates will get better if the Nasdaq sells off and will get worse if the Nasdaq rallies. So it is not necessarily what the Fed does that affects mortgage rates, it's how the Nasdaq and broader stock market interprets the Fed's action that will ultimately influence the direction of mortgage rates. This is because money managers and mutual fund companies typically keep funds in either stocks or bonds with very little in cash. If stocks are in favor, money is pulled from bonds, causing bond prices to drop and interest rates to rise. When stocks are being sold off, the money is then parked into bonds, which improves bond prices and causes interest rates to decline.

A closer look at the five rate cuts by the Fed this year shows that mortgage bond prices deteriorated after each Fed rate cut. This means that mortgage rates rose after the Fed had cut rates while many consumers were expecting their mortgage rates to decline. Worse yet are the consumers who missed the opportunity to obtain a lower rate because they mistakenly waited for the anticipated Fed action to cut short-term rates, thinking that longer-term mortgage rates would decline as a result.

Predicting the future is tough, so nothing is written in stone. Keep an eye on the Nasdaq, and keep in mind that the best rates may be behind us. But, mortgage rates are still low and could have some quick dips so make the most of them while they last.*

To find out more information on the current trend of interest rates and future Federal Reserve rate moves, please contact Bill Kamboukos or Carlos Felix of Strategic Mortgage by calling them at 480-219-3682 or visit them online at www.strategicmtgaz.com

*Portions of Information Provided in article above is copyright Barry Habib, MMG.

In what has become the norm, another day and another move to help stem the rising tide of financial problems. Today it was the Federal Reserve cutting Federal Funds Rate another .5% to 1.5%, bringing the prime rate to 4.5%. As well as cutting the discount rate another .5% to 1.75% in a move that coincided with 5 other central banks internationally, signaling fears over a global recession and cutting rates or indicating a willingless to do so.

Most notablty, The Bank of England put into effect this morning a bailout program of its own, that will make available up to $350 Billion for it's nations banks.

This is the eighth Federal Reserve rate cut since September 2007 and the second outside a Fed meeting this year. The fed funds rate is the central bank's main tool to affect the economy. Lowering the rate pumps money into the economy by reducing the borrowing cost on a broad range of loans, including credit cards, home equity lines and many business loans.

While the discount rate is the level at which it lends money directly to banks and Wall Street firms, by half of a percentage point to 1.75%.

This is just the latest move on what increasingly has become an international financial problem. We will continue to provide relevant updates as they occur.

LOAN MODIFICATION HELP FOR SOME HOME OWNERS:

Settlement Opens Door For Countrywide Customers

In a plan that was announced by Bank of America, perhaps the most aggressive foreclosure prevention and loan modification effort ever undertaken by a U.S. bank will begin.

However, it is also important to note that this program is in response to legal action brought against Countrywide (bought in July by Bank of America) from eleven different states for unfair lending practices.

The program is scheduled to start in December and will be open to distressed borrowers who signed up with Countrywide Financial between January 1, 2004 and December 31, 2007.

This new program came in a legal settlement that the company entered into with the attorney general offices of 11 states, who had sued Countrywide over predatory lending practices, but the company stated that borrowers in all 50 states will be eligible to participate in the program. However, it will be up to state legislative bodies to work with Bank of American to make this a reality.

"The Countrywide settlement is a watershed moment for loan modification programs," said Mark Pearce, North Carolina's Deputy Commissioner of Banks and a member of the State Foreclosure Prevention Working Group. "This is, by far, the best [program ever], even better than the FDIC program with IndyMac Bank."

As part of the initiative, Bank of America will cut monthly housing payments, including mortgage, property taxes and insurance, to no more than 34% of gross income for at least the first year of the new loan. The move is expected to help keep as many as 400,000 troubled borrowers in their homes, but of course like many other programs, we will hold final judgement until the program takes effect.

The program targets holders of subprime adjustable rate mortgage (ARMs), subprime fixed rate loans and option ARMs, but prime and Alt-A borrowers, who did not document their income, will be eligible as well.

"This is the biggest mandatory modification of loans in U.S. history," said Jerry Brown, attorney general of California, the state with the largest number of borrowers who may benefit from the settlement. "Of course, we never saw such a big rip-off by any other company either."

According to Simon, the Countrywide program will proactively screen all of its borrowers for eligibility, and then contact them directly to offer loan workouts. No prepayment penalties or modification fees will apply. But the program can't help every Countrywide borrower. Some, because of illness, divorce, job loss and the like, simply won't be able to afford any reasonable mortgage payment.

Simon added that Bank of America is training personnel and putting systems into place that it hopes will enable staff to deal with a large number of mortgages all at once.

The new program comes with a price tag of $8.4 billion, but Simon says that it will cost much less than foreclosing on homes en masse.

Depending on each borrower's circumstances, Bank of America might freeze or lower a loan's interest rate or even cut the principal loan balance, through a streamlined process.

The bank said it will also participate in the government's Hope for Homeowners program, a provision of the housing rescue bill which went into effect Oct. 1 and makes FHA-insured loans available for delinquent borrowers.

The announcement of the program came on the heels of Friday's approval of the $700 billion Wall Street bailout, a measure which has been criticized for failing to address the foreclosure crisis head on.

"Now that we've gotten this with Countrywide, I would expect that we'll be talking with other major servicers to implement similar programs in the near future," said North Carolina Deputy Commissioner of Banks Mark Pearce, who worked on this settlement.

But he and other members of the the State Foreclosure Prevention Working Group have been pushing other lenders to do something this drastic for months, without much luck.

"So far, they have failed to show the leadership required to get it done," said Pearce. "I hope, having the market leader do this will spur the other servicers to greater action."

For more information on this loan modification program and other modification, please contact Bill Kamboukos and Carlos Felix of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com

As we all know by now, the $700 Billion Bailout Bill as it has been tabbed, has now passed. There are still many questions to be answered surrounding the program. Mainly, will it help revive the banking and financial sector? If Wall Street today was any indication, the initial sentiment is, "No."

We do however now know who the potential $700 billion man is that will be in charge of oversight of the funds this new bill provides, Neel Kashkari. Who much like Treasury Secretary Henry Paulson, is a former Goldman Sachs employee that works in the Treasury. Find more information on him below at the link from CNN Money.

http://money.cnn.com/2008/10/06/news/economy/treasury_hiring_guidelines/index.htm

In what has been another intriguing week in the future of the U.S. economy, we are on the verge of many more changes. Following the governments take over off Fannie Mae and Freddie Mac a week ago, we have seen long term interest rates move to their best levels this year. Unfortunately, that was also followed by the collapse of companies such as Merrill Lynch and Lehman Brothers, with more to come. So, in today's turbulent market what items should we be concerned with in the short term?

FHA LOAN LIMIT CHANGES

Currently in Maricopa and Pinal Counties in Arizona, the FHA loan limit is $346,250. This number was revised in March of 2008 as part of the economic recovery act that also temporarily raised loan limits on conventional loans in high cost areas such as Southern California. Unfortunately, at the end of the year, this number will be reduced and now we know what the number will be. The new loan limit for Maricopa and Pinal Counties in Arizona will be $318,550. Meaning that if you are looking for a lower down payment loan or need an FHA refinance and are looking for a slightly higher loan balance, the time to act is now, as loan limits will be decreased on January 1^st 2009.

What About Down Payments?

By now, we all know that seller funded down payment assistance on FHA mortgages will be going away completely on October 1^st and realistically is gone, unless you have a signed contract on a home already. As we sit most lenders are not allowing down payment assistance on new loan submissions as of today. However, the other thing to remember as well is that not only does the new Housing Rescue bill eliminate down payment assistance, but it also raises the amount of down payment needed on an FHA loan to 3.5%. There is still some time to avoid the 3.5% down payment requirement, but the time to act on having a purchase contract accepted is now.

Long Term Interest Rates Decrease

Following the government take over of Fannie Mae and Freddie Mac, the U.S. Treasury and mortgage bond market was seen as a safe haven. Leading investors to buy both of these bonds, which lead to lower long term interest rates. In addition, with the recent downturn of the U.S. stock market, spurred by company failures at Merrill Lynch and Lehman Brothers, to name a few. The sell off in the stock market equates to a boom in the treasury and mortgage bond market, leading to the lowest interest rate levels of the year. However, while some believe interest rates will stay low, long term rates may actually rise if the Federal Reserve does cut interest rates as is widely expected. That is because another rate cut could lead to increased inflation concerns, which is negative news for interest rates and leads to higher long term rates.

Short Term Interest Rate Decrease Coming?

Today the Federal Reserve is meeting and it is widely expected that they will cut the Federal Funds rate by .25%, but could also cut up to .5% from the Federal Funds rate. This will make borrowing from the Federal Reserve discount window cheaper for banks. It would also be a move to help stabilize the effects of the turmoil seen in the stock market the past week.

The effects of this type of move on consumers should be lower interest rates on home equity loans, auto loans, personal loans and credit cards. However, as noted before, this rate cut, could actually mean higher long term interest rates, as we have seen before following the recent Federal Reserve rate cuts. No doubt, it will be another wild week in the U.S. market. Make sure check in next week to see how the Federal Reserve's actions and the failure of financial institutions will affect you.

For more information on changes to FHA mortgage and long and short term interest rates, please contact Bill Kamboukos and Carlos Felix of Strategic Mortgage at (480) 219-3682 or by emailing: info@strategicmtgaz.com or online at www.strategicmtgaz.com