Federal Interest Rate Cuts and You
What does a change in the federal interest rate signal to the average consumer? Does a crisis for one type of borrower equal a crisis for all?
Mark Jones
The Federal Reserve has been under intense pressure recently to manage the direction and the pace of economic growth. Conflicting concerns have put the Fed in a precarious position: Potential inflation, which typically leads to upward interest rates, is countered by signs of a stalling economy and a troubled housing market — trends that typically combine to lead to lower interest rates.
Due to recent fears in the real estate market — from property value concerns to questions of borrowers’ ability to repay debt — many sources of funds that supply needed capital for loans have been drying up. To date over 120 mortgage companies have closed their doors due to reduced liquidity and the elimination available programs geared to helping borrowers with high-risk credit profiles.
Many media outlets have added fuel to the fire by creating overwhelmingly negative stories on the current situation. However, statements that lending has stopped altogether or financing with less than 20 percent down is impossible are grossly overstated. The fact is, as with any big story, scenarios get taken to the extreme and are blown out of proportion. (When you think about it, large stock market rallies often go beyond the point of logic and negative events cause pullbacks into areas that don’t make sense either. )
This is the case with the current lending environment. We know that the market has gone too far when A-rated borrowers with 20-percent down, excellent credit, and a very strong overall financial picture start paying interest rates significantly higher than on a conventional loan because the loan is considered a jumbo loan, or more than $400,000. Further, we know the financial situation is being blown out of proportion when the stock of a company like Thornburg Mortgage, whose entire business model is built around specializing in A-type jumbo mortgages with an excellent current delinquency rate of 1 percent, falls by more than 50 percent in the course of a week.
Sure, borrowers who want non-conforming loans have fewer, more expensive options, but that probably should have been the case all along.
Here’s the good news: There has been no significant impact by recent events to conforming interest rates and loan programs through community banks and those backed by Fannie Mae and Freddie Mac. Jumbo loans are still available at attractive rates and there is a host of conforming products to choose from. In fact, over the last couple of weeks, liquidity concerns in the market have been subsiding and though financing continues to be difficult to obtain by high risk borrowers, a sense of normalcy is returning to the market for well-qualified borrowers.
For additional information visit my website at www.askmarkjones.com.
