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Economic Insights

Fed cuts rates by half percentage point

September 18th, 2007 4:11 PM

Fed cuts rates by half percentage point

Marketwatch - September 18, 2007 4:03 PM ET

WASHINGTON (MarketWatch) -- In a surprisingly strong move, the Federal Reserve unanimously voted to cut its overnight interest rate target by a half percentage point to 4.75% Tuesday, citing turmoil in financial markets as a threat to economic growth.

U.S. stock markets rallied on the first cut in the federal funds rate in more than four years. Financial markets and analysts had been expecting a smaller quarter-point cut.

The Fed also cut the discount rate by a half percentage point to 5.25%. Read the statement.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the statement from the Federal Open Market Committee said.

"It's definitely a bold move, particularly in light of the strength of stock market," said Mickey Levy, chief economist at Bank of America. "The Fed wanted to stay ahead of the curve" and didn't want to have to cut again before its next meeting on Oct. 30-31.

The drop in the fed funds rate is expected to be matched almost immediately by banks dropping their prime lending rates. Bank of America lowered its prime rate within minutes of the announcement. Most banks peg their prime lending rate to the fed funds rate. The interest rates on many adjustable-rate mortgages and credit cards are pegged to the prime rate.

"Developments in financial markets since the committee's last regular meeting have increased the uncertainty surrounding the economic outlook," the FOMC said.

The committee said growth had been moderate but judged that "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth."

Ahead of the announcement, the National Association of Home Builders said confidence among builders fell to its lowest level in the 22-year history of its housing index, a sign that the housing market could continue to worsen in coming months. See full story.

The FOMC signaled that further rate cuts could be coming, saying it would monitor the situation and that it stood ready to act if necessary.

But Mike Englund, chief economist at Action Economists, said this might be the only rate cut if the credit crunch unwinds.

"Though the risks are that the Fed eases again, our best guess is that this is one and done," Englund said. He noted that the Fed statement did not contain any mention of a "bias" toward future action.

Inflation readings had improved modestly, the FOMC said, but some inflation risks remain.

On the other hand, Bill Gross, chief investment officer at Pacific Investment Management Co, said in a television interview that the Fed will likely have to cut rates as low as 3.5% to counter the weak growth that he expects over the next year and a half.

Neil Soss, global head of economics at Credit Suisse, said he expects another quarter-point rate cut by the end of the year, most likely at the next meeting on Oct. 30-31.

"Simply because the data have been on a weaker run and this is a Fed that is not looking for opportunities to sit on their hands," Soss said.

Background to cuts

What started as turmoil in the market for subprime mortgages -- those mortgages at less than the best credit quality -- has mushroomed into a global credit crunch.

Savvy and wealthy investors, hedge funds and banks found that they held subprime loans as part of complex derivative securities. Since mid-August, financial market conditions have worsened. Cost of credit has soared and its availability has been limited.

This forced the Fed to quickly switch direction. After saying in early August that inflation was its No. 1 concern, the Fed said on Aug. 17 that downside risks to growth had "increased appreciably."

Since then, concern about the economic outlook has grown and economists have been busy cutting their forecasts for the fourth quarter and early next year.

Fed Chairman Ben Bernanke said three weeks ago that the central bank is paying "particularly close attention to the timeliest indicators" to assess how the recent credit crisis and market turmoil are affecting the real economy. See full story.

In a sense, Fed officials are relying on their gut instincts as there is little firm evidence yet that the tight credit has hurt the economy.

And after the August employment report showed the first drop in payroll jobs in four years, market expectations of a rate cut were cemented. See full story.

Before the announcement, economists were leaning slightly toward the expectation that there would be a quarter-point cut, but many favored a more aggressive half-point cut, particularly after several nonvoting Fed bank presidents said they feared that any cut by the Fed would be seen as bailing out investors, thus encouraging more risky behavior in the future. See full story.

This was the first cut in the federal funds target rate since June 2003. The funds rate is at its lowest level since May 2006.

The federal funds rate is the rate banks charge each other for overnight loans to meet the Fed's reserve requirements. By buying and selling short-term Treasury bills, the Fed manipulates short-term rates in the market, allowing banks to increase or decrease the funds available for loans.

Over the last month, the effective funds rate has been lower than the Fed funds rate. Some economists said it was an extra bit of liquidity from the Fed.

Ultimately, the fed funds rate influences even longer-term rates, such as mortgages, corporate bonds and Treasury notes.

The separate discount rate is the rate it charges banks to borrow money from its discount window. Reducing the rate is seen as a way to add liquidity to financial markets. The rate, which has little impact on consumers, is set by the seven members of the Fed board of governors.

The recent financial turmoil has had a distinct global nature. The U.K. government was forced earlier Tuesday to step in and guarantee all deposits held by mortgage-lender Northern Rock after queues of customers demanded their deposits.

Posted by Heath Lefort - Personal Financial Advisor on September 18th, 2007 4:11 PMPost a Comment (0)

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BUSH ADMINISTRATION TO HELP NEARLY ONE-QUARTER OF A MILLION HOMEOWNERS REFINANCE, KEEP THEIR HOMES

September 4th, 2007 5:12 PM

BUSH ADMINISTRATION TO HELP NEARLY ONE-QUARTER OF A MILLION HOMEOWNERS REFINANCE, KEEP THEIR HOMES
FHA to implement new "FHASecure" refinancing product

WASHINGTON - President George W. Bush today announced that HUD's Federal Housing Administration (FHA) will help an estimated 240,000 families avoid foreclosure by enhancing its refinancing program effective immediately. Under the new FHASecure plan, FHA will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing.

In addition, FHA will implement risk-based premiums that match the borrower's credit profile with the insurance premium they pay-i.e., riskier borrowers pay more. This common-sense, risk-based pricing structure will begin on January 1, 2008.

"Many hard-working American families who were able to make their mortgage payments under the initial teaser terms of the exotic loan are now struggling to make ends meet because their rates have doubled or tripled," said HUD Secretary Alphonso Jackson. "FHASecure will bring stability to the housing market and give eligible families who were in good financial standing before their loans reset a chance to keep their homes."

The combination of FHASecure and risk-based premium pricing will permit FHA to return to the role it was originally designed to play, bringing stability to the real estate market by helping break today's cycle of foreclosures and price depreciation and creating much needed liquidity in the now-constricted mortgage market.

FHA has recently experienced a substantial increase in the number of conventional borrowers refinancing into FHA products. With FHASecure, it can help even more. The number of these refinancing transactions has tripled since the start of 2006. FHA's transactions are projected to surpass 100,000 loans by the end of the fiscal year. To date, these figures do not include refinances for delinquent borrowers.

The FHASecure initiativewill operate under the same safe guidelines as the FHA's existing mortgage insurance program without affecting FHA's financial health. Eligible homeowners will be required to meet strict underwriting guidelines and pay a mortgage insurance premium, which offsets the risk to FHA's insurance fund at no cost to the taxpayer.

The risk-based insurance premium structure will further expand FHA's reach to additional underserved borrowers, particularly minorities and first-time homebuyers who have been disproportionately lured into exotic mortgages, and enhance the FHA's overall risk management. The move to risk-based premiums ensures that FHA remains on solid financial footing as a self-financed agency for the long-term.

FHASecure, like all FHA products, will be underwritten to ensure the borrowers have the ability to repay the loan, will require escrow for taxes and insurance, and will continue to offer unprecedented foreclosure prevention assistance. The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.

To qualify for FHASecure, eligible homeowners must meet the following five criteria:

1. A history of on-time mortgage payments before the borrower's teaser rates expired and loans reset;

2. Interest rates must have or will reset between June 2005 and December 2009;

3. Three percent cash or equity in the home;

4. A sustained history of employment; and

5. Sufficient income to make the mortgage payment.

"FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates," said Assistant Secretary for Housing-FHA Commissioner Brian Montgomery. "These homeowners, many of whom are minorities, need a safe, affordable mortgage product that will help build wealth. All FHA borrowers pay mortgage insurance premiums to offset claims to the FHA insurance fund and ultimately prevent risk to the taxpayer."

FHASecure will also bring much-needed liquidity to the mortgage market. FHA anticipates more lenders will offer FHA-insured loans, pool them, and securitize them with the Government National Mortgage Association (Ginnie Mae), which has the full faith and credit of the U.S. government. This guarantee makes Ginnie Mae's mortgage-backed securities the safest on the market and helps to channel greater capital into the housing market, benefiting U.S. homeowners.

Since its inception in 1934, FHA has helped almost 35 million people become homeowners, making it the largest insurer of mortgages in the world. The 109th Congress introduced the Expanding American Homeownership Act in June 2006 which would enable FHA to be a safe option for more underserved low- and moderate-income and minority families so they can achieve the American Dream of homeownership. Today, President Bush also urged Congress to quickly pass the Administration's FHA modernization proposal to help more families in need.

For more information about FHASecure, please just call or e-mail

Posted by Heath Lefort - Personal Financial Advisor on September 4th, 2007 5:12 PMPost a Comment (0)

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Economic Insights

BUSH ADMINISTRATION TO HELP NEARLY ONE-QUARTER OF A MILLION HOMEOWNERS REFINANCE, KEEP THEIR HOMESFHA to implement new "FHASecure" refinancing product

BUSH ADMINISTRATION TO HELP NEARLY ONE-QUARTER OF A MILLION HOMEOWNERS REFINANCE, KEEP THEIR HOMES
FHA to implement new "FHASecure" refinancing product