Gulf Coast Associates' Blog: Interest Rates

Well, the Federal Reserve fired its guns again today to try and help the struggling U.S. economy. Both Stocks and Treasuries were up sharply following the stronger than expected unanimous decision to cut the Fed Funds and Discount rates by 0.75%. In addition, they also made it quite clear in their policy statement that they are willing to expand the balance sheet to increase liquidity and help spur economic growth.

While the moves are all well and good, perhaps the best thing they did today was note in their statement that the Fed "is ready to buy more mortgage agency debt and mortgage-backed securities if necessary" and that the "Fed funds rate is likely to remain exceptionally low for some time to come." The bottom line in this thinking is that housing…

By a 9 to 1 vote, the Federal Reserve's monetary policy committee (FOMC) cut the Fed Funds and Discount rates by 50 basis points today. The fed funds rate now stands at 3.00% and the discount rate at 3.50%. In their statement released right after the meeting, the committee stated that "financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets. The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."

The move bolsters last Tuesday’s emergency rate cut of 75 basis points and is something…

Two things are for sure in 2008 for the mortgage lending industry; higher borrowing costs and more government regulations. While many say these are the necessary reforms needed to deal with the mortgage debacle of 2007, we see them as the consequences of an industry unwilling to regulate itself. The problem is, the only ones who will truly pay for an industry that ran amok, are the people looking to borrow money to buy a home.

So, in order to right the ship, here are some of the things that will happen, or, are proposed to happen to the industry in 2008. Some are sound changes and should be welcomed. Others are onerous or shortsighted as are most new regulations when the government has to intervene to correct abuses in the marketplace.

Higher Mortgage…

Today, the Bush administration and the Lending Industry announced their plan for helping homeowners who are facing higher mortgage payments when their upcoming subprime ARM loans reset. Faced with the prospect of 2 million subprime mortgages scheduled to reset at higher interest rates in the coming years, the agreement will freeze the loans' current interest rate for the next five years. The administration stressed that the deal is not a bailout because no government money is involved and limits will be put in place as to exactly what type of borrowers will be eligible for the program.

By adopting such limits, only those borrowers who are current on their payments and can't afford the higher reset interest rates will qualify. Borrowers who have been …

Treasury Secretary Henry Paulson announced on Monday there could soon be an agreement between the government and the major players in the mortgage industry to help thousands of American homeowners avoid mortgage defaults by temporarily freezing borrower’s lower introductory rates to keep them from resetting to higher levels for a period of years.

Paulson was addressing a national housing conference and said in his speech that this effort was a “pragmatic response” to the current realities of the worst housing slump in more than two decades. He also noted that the number of homeowners unable to meet their higher monthly mortgage payments because of their rates resetting is currently soaring and will continue to do so unless something is done to help…

The Federal Open Market Committee, the monetary policy arm of the Federal Reserve, held their September meeting today and by unanimous decision, lowered both the Fed funds and Discount rates by 50 basis points each. It was a bold move to help an economy trying to deal with the recent developments in the financial markets; specifically, a tightening of credit conditions that was intensifying the housing correction.

The rate cuts are designed to forestall adverse economic conditions, foster price stability, sustain growth and hopefully ward off the potential for a recession. In addition, they will help with the growing foreclosure situation, keeping mortgage rates low and give a boost to the ailing housing market.

Recent evidence shows that the risk of…

As those of you who have read our Blog before know, we are not fond of how a large segment of the mortgage industry has conducted itself in the last few years. Common sense went out the window in order for lenders to make huge profits under the guise of helping borrowers obtain more housing opportunities. Unfortunately, it doesn't take an economics degree to see where that got us. Making bad loans because you can does not mean you should. And, originators making them in order to pad their income is even worse.

Perhaps the saddest part of all is that, to date, we've seen very little of the industry actually doing anything to curb the abuses. In fact, we were dumbfounded recently after attending a seminar, where it was made crystal clear that subprime is…

Well, its finally happened. The bond market has accepted the Federal Reserve is not going to be decreasing interest rates any time soon. Up until last Tuesday's hawkish inflation comments from Fed Chief Bernanke, the market had spent the first part of this year believing the Fed's next move would be downward. But, not anymore. In the span of less than 14 days, we have risen from a 10-Year Treasury yield of 4.84% to 5.15% on Friday morning. Mortgage Backed Securities followed suit and thus interest rates on 30 year mortgages were up to 6.75%. It would not be surprising if we hit the dreaded 7% level in short order.

Now we know people like to say "were still at historically good rate levels", but that is just so much hot air. Housing sales are in the tank…