The Fed steps in

I imagine you have been reading about the liquidity crisis in the lending industry. How can you miss it with big names like Countrywide involved discussions re: a potential bankruptcy. Many of the companies that have imploded have done so due to a lack of available funds for their current loan fundings. This occurs when the commercial lines of credit they have available disappear or are somehow otherwise unavailable (for example, if they are unable to sell the paper and pay off the fundings of previous days...) The concern is that many of the larger institutions will also go down due to the lack of investor funds.
And, the fed steps in:
Today (08/17/2007), in an unprecedented move, the Federal Reserve made an emergency Discount Rate cut of .50% (1/2 percent) in order to attempt to avert further liquidity crisis (cash shortage) in the banking industry.
This does not mean that mortgage rates have been cut. And this is not the same thing as a Fed Funds rate cut. There is an important difference. In order to understand what this means, you need to know a few basic definitions:
The Federal Reserve banks’ primary responsibility is to ensure that
fluctuations in the demand for cash does not disrupt the banking
industry.
Fed Discount Rate: The interest rate at which eligible banks may
borrow funds, usually for short periods, directly from a Federal
Reserve Bank – this is to meet temporary shortages of liquidity
caused by internal or external disruptions (also known as the
Discount Window)
The Discount Rate has very little to do with how retail interest rates ultimately affect consumers of loans and credit, but rather primarily affects the internal stability of the banking industry
Fed Funds Rate: The interest rate at which non-Federal Reserve banks
lends immediately available funds to other non-Federal Reserve banks
overnight (Also known as the Overnight Lending Rate) The Fed Funds rate is the one that is adjusted to increase growth or moderate inflation of our overall economy. This usually has a direct effect on the 10 Year Treasury Bill, which is the primary driver of mortgage rates. A Fed Funds rate change has a significant impact on retail interest rates.

In summary, it would be a mistake to assume that because the Fed Discount Rate has been lowered to help the banks avoid a cash crunch meltdown, that mortgage rates will either drop or go up. This is because the primary Fed Funds Rate has not been revised. In fact, it is just as likely that as the stock market recovers, mortgage rates are more likely to go up than down! This is because bonds will get sold, which raises the yields and therefore mortgage rates.
Any impact of this Discount Rate cut remains to be seen and will only play out in a macro-economic, long term way via restored confidence and liquidity of the banking industry.

If you are considering buying or selling a home in South Orange County, call on the experts! Dianna and Brian McGarvin 949-370-2652 or visit our website at http://www.pierbowl.com/.