Missing link: The Fed and mortgage rates

Fed Chairman Ben Bernanke (pictured) is a powerful man, but he cannot move many of the interest rates that matter. What's more, he can't make banks loan you money and he can't convince investors that mortgage-backed securities are worth buying.

News item from today's L.A. Times:  "The Federal Reserve has been slashing short-term interest rates since August with precious little effect on the one that matters most to homeowners and home buyers: the 30-year fixed mortgage rate."

More: "That rate is roughly where it was a year ago, while the discount rate, which is what banks pay to borrow directly from the central bank, is 4 percentage points lower."

Think about that: the cost to banks to borrow is down 4 percentage points in a year. The cost to borrow for a 30-year fixed mortgage hasn't moved.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Bloomberg News

Comments

[tony]

And the banks just pocket the difference. Every little bit helps when you're leveraged 40 times over and on the brink of going bust.

[Uncle Billy]

He looks like a tired man, too, in your photo. I would say "asleep at the wheel" if he wasn't in the backseat. Who's driving?

[Rob]

Well so much for the sh*#! rolls downhill theory...

[Mary]

It's more complicated than that. While you may get your original mortgage through a bank, many are written by mortgage companies. Then most of them are sold to Freddie Mac or Fannie Mae which operate outside the realm of the Federal Reserve.

[Laker]

This is THE bailout for the banks. They get their margins fat up to 4% more than they had before.
Question is, if the FED has opened its discount window to non bank institutions like I banks and is charging them 2%.

WHY NOT JUST OPEN THE DISCOUNT WINDOW TO THE
HOME BUYER???

The fed should simply give loans to buy houses at 2% rate fixed for 30 years.
This will prop up prices of houses like a ton of viagra. Then LEFTY will be happy!

[ray]

That's why Lawrence Yun, and the National ASSociation of Realtors, say you should buy a house now, because interest rates are at historic lows!!!

Wink. Wink. Nudge. Nudge.

[Michael Snyder]

It's a sad commentary on the state of a society when we're forced to include "ethics" in our college curriculum. What's worse is discovering an entire generation of our "best and brightest" skipped class. What we're suffering is a crisis of confidence brought on by "top tier" financial concerns following a business model that Tony Soprano would deem "just f**kin' nuts!

http://www.bloomberg.com reports "As Bear Stearns Implodes, Spector Keeps $382 Million" . Being as JP Morgan just paid $232 million of our dollars ( on loan from the Fed) for the entire company; that's a lot of money for playing bridge while your corporation's being sold off for four cents on the dollar. Even Ted Turner didn't have that kind of chutzpa. To further "bolster confidence" Bloomberg reports, "Merrill Lynch & Co. sued XL Capital Assurance Inc. over default protection on $3 billion of collateralized debt obligations that the bond-insurance unit of Security Capital Assurance Ltd. is seeking to void."

Clearly applying an argument of "moral hazard" to this new wave of corporate welfare is as inapplicable as an argument involving logic. It's a waste of time to teach a pig to sing, (just ask Mark Twain) and applying morals to narcissistic sociopaths or logic to the insane is equally a waste of time.

In their desperation to contain this crisis, Paulson & Bernanke are actually deepening the trouble by further homogenizing collateralized debt. What's worse is they're polluting the Treasury's bonds with collateral that's still being rated four or five levels higher than it should be. Instead of standing strong and telling their buddies at Goldman Sachs they're just going to have to do without that new yacht, they're placing peer pressure ahead of reality and prolonging the pain in the process.

investorguy made a good point as he was decapitating CD the other day. All the bitchin' and moanin' in the world won't earn anybody a dime. Bear markets are rife with opportunity for those who've positioned themselves to take advantage of it. If you're cash heavy in a savings account that's running negative after taxes, infrastructure support stocks look good over the next five year window, and I like "green infrastructure" for a ten year window. Gold's showing just how "bubblelicious" commodities are right now and day trading seems like making a living at Del Mar.

It's clear the folks "driving the boat" really don't care about the day to day realities that confront the average citizen. What's more they're clearly out of touch with reality as it applies to their "field of expertise". You can talk about "velocity of money" until you're blue, but in reality it's a juggling act. Simply circulating money doesn't produce anything but commissions that are paid by leveraging the position ever higher. For a decade its' been, "Around and around and around she goes. Where she stops nobody knows." I'm thinkin' we're about to find out.

[bullwinkle]

Why doesn't the fed just directly lend to the home owner ..lets say a 100 year refi at 2 % lets say .... let everyone who has a home have access ... once the market is stable conventional rational forces will take over. It may take a while to inflate back to "value" and ratios ... oh well thats what happens when you overpay...... what we need in the market is time, patience and fundamentals not knee jerk reactions that fuel volatility

Meanwhile the fed keeps bailing out the "old " economy ... they haven't figured out that alchemy doesn't work.., you cant turn lead into gold, or bad debt into good by instiling "confidence" or changing the economic models .... - bear stearns found out the hard way ... the others will follow soon... its kind of like watching a train wreck with the fed at the wheel ...

so sad

[CD]

The best signal you can make about your displeasure on this matter is removing yourself from the stock market and stash the money away from those clowns....They have killed the goose with the golden eggs.

[tew]

Banks borrow short and lend long. The discount rate doesn't drive (fixed, long term) mortgage rates, the 10 year treasury does. The difference between mortgage rates (fixed) and the 10 year yield is a measure of risk premium and includes the price of the refi "put" embedded in standard long term fixed products.

[Maggie Knowles]

Very one-sided, benefits the big banks/lenders, benefits to consumers is very little. What's new?

[TrojanDLA]

Peter, you should know that there is no direct connection between long term interest and short term interest (controlled by the Fed).

Long term interest rates have ALWAYS been governed by macro-economic variables (both domestic and global) unaffected by Federal Reserve action - this has always been the case. Ask any economist to chime in on this point.

[puckhead]

Anyone want to bet how long before the FED or some new gov't agency starts exchanging Mortgage back securities for Treasuries? By the end of this, our gov't could end up being the biggest landlord.

[MyLessThanPrimeBeef]

Bin Lackey rescuing the economy reminds me of a tree frog making a jump across the pond. I couldn't believe it when I first saw it, but it's true that when a tree frog jumps, it closes its eyes...every time, it never fails. And srangely enough, it lands where it wants to go even with its eyes shut.

Unfortunately, Bin Lackey is less than a tree frog. He can shut his eyes trying to be one, but he will still miss his mark.

So, all the sad recent events have shown is that 1), chimps are smarter than college students and 2) tree frogs are smarter than the Fed Reserve chairman and 3) we are out of voodoo magic.

Lastly, unless he's actually navel gazing and I am wrong about this, Ben should quit moonlighting as a black helicopter pilot. He looks tired. Get someone local in Montana to do that.

[BottomFisher]

How about a blogger solution. Why doesn't the Fed just buy up all the foreclosed homes and GIVE them to all of us renters who have good credit and are responsible citizens and are not foolish, but haven't been able to afford a home over the last 10 years because of all the greed, fraud, speculators driving prices to the moon. The crooks and stupid people who lied on their loans can then rent or live in tents. Problem solved. This would make a good movie....oh...never mind ...the title Trading Places is already taken....shoot.

[sfvrealestate]

There's a good post about this very thing on HousingChronicles.com today. I have otherwise-qualified buyers just waiting for the rates to come down, as we all expected they would with (first) the interest rate cuts, then (2nd) the economic stimulus package, and (finally) with more rate cuts. And they're pretty disappointed. To paraphrase one of the other regular posters here, it seems to be a game of "privatize the pleasure, socialize the pain."

[LeavinLA]

BottomFisher: So you want a bailout?

[pharmlaw]

Last year I had an ARM which would have reset at between 8-9% so I refinanced in advance to 6.625%. Now I want to refinance again to get a better rate - my original rate was 4.375 - but the banks tell me my rate would now be still over 6%. They have recevied 4% from the taxpayer/Feds, and they are hording it! I told them to well-you know. Told them it was usery. They are making 4% off my mortgage and I am looking for a new bank. Way to go, Wells Fargo - I have paid on time for over 5 years!

[Eric Toya - LWM Blog]

Does anyone remember when Greenspan was steadily raising short term rates from mid '04 to mid '06, and mortgage rates were not going up with it? It was a conundrum, as Greenspan put it.

Tew is right, the Fed doesn't determine mortgage rates, the market does.

[SJ]

Hey SFVrealestate,

Those "other-wise qualified buyers" you talk about are are also waiting for something else - Home prices to drop (inevitably) further.

The housing mess will not unwind itself in 2008.

Wait another year and save yourself 15 - 20%

That's not just me talking - even the president of Freddie Mac said prices on homes have only dropped 1/3 of their distance.

Anyone who buys a home now is foolish.

[jerry]

The Dow Jones today dropped 293 today. Despite the fact that it is up 65% since the bull run began in October 2002, the Wall Street babies (led by chief neonate Jim Cramer) will be crying again until Kristen gives the Wall another pacifying rate cut.

So much for the Fed protecting us from inflation which is at a 17 year high.

[1]

I agree Ben looks tired, but he and his administration are a failure. All the money wasted propping-up a doomed sector of the economy. He didn’t create the problem, but he also isn’t the one to fix it either.

Ben should resign and someone else with better judgment and business skills should be leading this effort. How many times does the market have to send a “no confidence” vote to the Treasury?

Is it really so bad to let the economy fall to fundamental values and rebuild from there instead of this expensive, drawn out decline? We are going to end up in the same place regardless.

[NoWayinLA]

Supertanker Ben's actions are actually guaranteeing the exact opposite of his intended consequence. The return on the investment in a 30-year fixed is reduced if inflation is high, so investors raise their rates to offset the loss. And every round of short-term rate cuts gives us more inflation.

The only homeowners/buyers who benefit are those with variable-rate mortgages. Buyers would do best to stay away, as though those may look attractive now, we know rates can't stay this low forever. And for owners with resetting ARMs, it remains highly doubtful how many will be able to stay in their unaffordable homes despite the low short-term rate, or for how long.

The reality is, the middle class is screwed, no matter who you are or what your loan looks like, since everyone will feel the pain of inflation. If the government would just shut up about helping distressed homeowners, drop the pretense, and lay out their reasonings on why this bailout of the financial market is necessary, I think we'd all appreciate it.

[BottomFisher]

LeavinLA .....I'm not for any bail outs...just hoping Washington reads this blog and jogs their one track minds...they must get off this stupid bailout insanity....enough already....stop punishing the responsible people and savers in this country. They are going back to promoting the same thinking that got us into this mess in the first place. Get Wall Street out of the Fed. Listen to your citizens.

[Geek Seek]

Missing Link: The Fed & M3

Tomorrow at 4:30 P.M. Uncle Feddy will release their report on the money supply. We've all gotten so used to talking about interest rates, but I'm still amazed at how little discussion there is about the quantity of money the fed is creating. They've been playing a long game of "everybody, look at the pretty interest rates" while the money supply has been increasing at a staggering rate.

My amazement began when I found out that they stopped reporting M3 - the widest measure of the money supply - back in March of '06. Their explanation was that it was expensive to report (try again) and that it didn't tell us enough to make it worthwhile (try again).

What's M3 got that the other M's don't have? Primarily it counts all the repurchase agreements and eurodollars. If you look at a graph of M1 and M2, there has been a nice steady incline, like in Europe. Add M3, though, and the graph goes completely vertical over the last few years. People who try to piece together M3 in the absence of reported numbers put the growth of M3 at over 16% currently -- roughly where we were at back in hyperinflation 70's.

Is it bad to create money in this environment? No, we're "injecting liquidity" to stave off the horrors of bank failures. Was it bad to create far too much money over the last few years? Ya think?

Take your eyes of the pretty interest rates... watch M3. (they won't let you see it directly anymore, but you'll see its shadow dart furtively across your $20 loaf of bread).

Wages, are you keeping up?

[Mark Too]

"The Federal Reserve has been slashing short-term interest rates since August with precious little effect on the one that matters most to homeowners and home buyers: the 30-year fixed mortgage rate."

Mentioning the Federal Reserve and homeowners and home buyers in the same sentence only confuses people. The Fed and our government don't care about homeowners or home buyers.

The lowering of interest rates is being done for the bennefit of Americas financial institutions and for them only.

One question that I have is, where did the Fed get the authority to assume the responsibility for the $30 Billion of debt that Bear Stearns had on their books? How can anyone in the federal government cut a deal with two publicly traded companies, JP Morgan and Bear Stearns, without any kind of oversight from congress? Did anyone other than the Federal Reserve Board have to sign off on this deal? President Bush perhaps?

[Matt]

in response to "Laker" above The fed does offer buyers the 2% loan. But it's in unadvertised rural development loans from the government. It's nice stuff check it out...

[Renee Giallo]

First of all The cost of a single family home is way to high, Second, A 30 year fixed rate should only be 2% or less, and third why not get rid of the FED RES and go back to the GOLD Standard..

[Ben Davila, Belleville, IL]

The Feds are trying to help the economy in a way. What is going on is that the grid of others has made it so bad that now the banks cannot even lend us money because the average american does not have the credit score the banks are looking for. I say let's not get any loans period and wait for some of the banks to go out of business and this will teach them a lesson. We do not have to get loans now. Everything is to expensive everyone should wait a few more months late summer. A few more banks are going down lookout. One thing is for sure negotiate your interest rate on YOUR CREDIT CARD NOW!