This from CNN Money for March 18, 2008: “The U.S. central bank cut key interest rate (federal funds rate) by 3/4 of a percentage point to 2.25%.”…”In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent”
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Thanks, ARDELL. I was going to do a quick post on this…I’m just returning from the Fannie Mae “road tour” where I learned nothing… it just confirmed the information that I’ve all ready posted here.
What I would like to add is that this drop in the Fed Funds Rate DOES NOT equate to a reduction in mortgage interest rates. In fact, since this is viewed as an inflationary action, mortgage rates are increasing. I’m receiving intra-day rate sheets “for the worse”.
Remember, this is great for your HELOCs–which have just dropped 0.75% in rate on your next statement (if your rate is variable and not fixed) and bad for unlocked mortgage loans.
Now that I got this off my chest…I can go back to work returning calls and emails from being at the seminar (where I got to meet Roger Ingalls).
Hi Rhonda,
I don’t normally report this stuff, but it was too big to not get it out there.
While you say it doesn’t equate to a reduction in mortgage rates, isn’t much of this about people with resetting arms who can’t refi them under new lender guidelines?
Doesn’t this affect those with ARM resets? Not immediate of course, but within a few months?
ARDELL it depends what the ARMs’ indice is. Many ARMs adjusting now will wind up with a very attractive rate and depending on what the home owners long term goals are and what their tolerence is to stomaching the “media on mortgage”; they may do very well not refinancing. Bottom line, they need to drag out their Notes and read them. The Note will tell them what the margin is that they need to add to the indice (Libor, CMT, 1 Year T…etc.) to see what their rate would be if it adjust today.
Thank you Rhonda. Which would be most impacted by today’s news? Libor? CMT? Other?
The Libor actually went up today. The European financial community sees the Fed rate cuts coming to an end.
Jay-
Which LIBOR curve are you referring to?
Here are the changes from yesterday to today:
1ML: 2.55875 to 2.53563
2ML: 2.56500 to 2.53688
3ML: 2.57875 to 2.54188
4ML: 2.48688 to 2.48000
5ML: 2.42500 to 2.43250
6ML: 2.36625 to 2.38250
7ML: 2.31375 to 2.34000
8ML: 2.27063 to 2.30000
9ML: 2.22375 to 2.25375
10ML: 2.20875 to 2.24000
11ML: 2.19375 to 2.22438
12ML: 2.17813 to 2.21000
So depends on what curve you’re talking about, not all is going up. Even though the European financial community see Fed cuts coming to an end. The Futures market is implying another 25-50bps cut by May.
Thanks for the great info. It is so disappointing that this hasn’t translated into cuts on rates for mortgages.
ARDELL
The Prime Rate will be most directly impacted by today’s cut to the Fed Funds Rate.
sfvrealestate –
Thats because these cuts are to help banks pad their income and loan more, not to help consumers buy homes (or anything) at cheaper rates. The Fed is determined right now to throw all of us under a bus to save Wall Street, so enjoy the ride (if you can afford gas).
I think it’s more about liquidity than profits. So in a way it is making loans more available.
sfvrealestate, if you check out the last several reductions to the Fed Funds rate…you’ll see that mortgage rates react negatively. Why? Because mortgage rates are based on mortgage backed securities (bonds). The Fed does not control mortgage interest rates.
b,
I am hearing more and more people wanting to move “closer in” to their jobs, to entertainment they can walk to, etc…due to gas prices.
b-
I actually think it’s the opposite. The market is so messed up right now that if the Fed does not try to keep the big names from going belly up, we may have a major bank run on our hands. What Rhonda said earlier about the MBS market is dead on. The market is practically dead right now and the Fed is trying to buy as much time as it can to restore some faith in mortgages.
Can you imagine if Bear declared bankruptcy, which they were prepared to do by the way? I actually am encouraged by the fact that the Fed stepped in and took the risk of those loans, no one else is willing to. The Fed is actually trying to prevent a total collapse of the financial system.
I know it doesn’t seem like it and the Fed should share in the blame for this mess, but I think they’re finally realizing that rate cuts won’t be enough. They are showing the willingness to do whatever it takes to keep the financial system intact at the risk of inflation. A total collapse of the financial system will hurt everybody, here and abroad.
The Fed will be firing blanks shortly…
Matthew-
For the sake of America and possibly other countries, let’s hope not.
Q-Diddy-
The market needs transparency and all assets to be marked to market. The Fed is merely delaying the inevitable correction.
We are in facinating times. The Fed has made some interesting moves as of late and I do have more hope recently (as Q-Diddy) than I did before. It took a while to get into this mess and it’s going to take a while to get out.
Q-Diddy –
Notice how the market reacted, rally in the financials and BS ended up far higher than the JPM price. Its all a joke now, at our expense. Expect rampant inflation as these stupid prop-up and hide the body games continue to plunge the dollar worldwide. Once Ben gets us to 0% we can settle in to a nice 20+ year long malaise ala Japan, complete with semi-nationalized banks which are worthless to the market. I would rather have short term pain than long term stagnation/decline. The US has shown a distinct ability to take a short term sharp drop and bounce back quickly since the depression. Ben is determined to take us the other way, which is far more painful to everyone involved.
It’s interesting to look at the historical changes in Fed rates and the periods of time they needed to dip as low as they are now. Seems like the first time in many, many years the went under 3% was right after 9/11.
http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html
Agreed. The market/Wall Street seems to just be completely absurd. Since when does a company announce 53% decrease in earnings and stocks move up 400. There appears to be some serious gaming going on to “recover” losses.
Incidently, I know of one local mortgage office that is throwing in the towel on Friday and I met with another who is likely going to shut down in the weeks ahead.
Rhonda, happy belated B-day. Yes, it is truly a mess.
Matthew-
In case you haven’t noticed, we are in a correction. The question is how long and deep will this go?
I believe the Fed is doing what it can to buy more time. I’m not sure if they can restore confidence in the US consumer or US assets to the rest of the world, but they are trying.
b-
In case you didn’t notice the dollar came back today.
What would you rather have seen? Bear going bankrupt? Other major banks going bankrupt? The Fed giving up? In another time, another place I would agree with you, let the market correct itself, but what we’re experiencing right now is the worse iliquidity in the history of the Capital Markets.
I don’t think the Fed cares about what happens in the stock market. Bear bounce back because the market felt the $2 bid was too low and it was. I’m glad to see it bounce back otherwise the valuations for other stocks would soon be under the gun.
You say the Fed is messing up at our expense, but are you sure that betting the other way will solve the problem? Do you really think that letting banks collapse will get us out of this in a shorter period of time? Had Bear declared bankruptcy the entire financial system would freeze. There is little confidence in the US right now and I don’t think that would have helped. Of course, I could be wrong.
Q-Diddy –
The system is already frozen, the crisis is one of insolvency and not liquidity as the Fed’s impotent actions so far have shown. We need to bring the bodies out into the day light or we are just making the inevitable much much worse. The solution to this problem is to go back in time 8 years and actually have some oversight and regulation of these entities. Since we cannot do that we face two choices. A) Clean house, get everything into the open, face a big crash and once again regain world status as the best, most transparent financial market in the world. B) Continue to limp along with continual bail outs, new schemes and anything at all possible to hide everything in the closet hoping somehow people will eventually forget about them. This is the path Japan took and we saw what happened to them, I do not want 20+ years of financial stagnation and economic malaise. While I think the crash will be bad if we go with A, we will be much better off in the long run for it. The financial markets can bounce back in several years after such an event, they cannot bounce back at all if we keep adding new crutches forever.
b-
Wrong! The system is not frozen. People still can go to banks to make deposits, banks are still lending to each other. What would have happened if Bear were to go bankrupt would be a major bank run. That would have frozen the market.
You seem to think the Fed is hiding something. What do you think these companies are hiding? Have they not taken losses and continue to do so? Are we not all aware that the Subprime market was a huge mistake? What is it that you’re trying to uncover?
This is not about the Fed coming up with schemes or bailouts. It’s not about hiding the truth. It’s not about trying to make people forget, though I could use a little of that myself. It’s about trying to say yes, we messed up, but not every asset we created is junk. Our assets are worth more than investors are willing to pay.
Tim earlier called this market absurd. I couldn’t agree with him more.
Nice job B, sounds like you have a firm grasp of what’s going on.
Q-Diddy, what is wrong with you?
Q-Diddy –
Give me a break, Bloomberg just did a very good analysis of these assets that are not “junk” and guess what? They are junk! We are talking about AAA (still) rated securities, being valued by the IB’s at 90c+ on the dollar according to their models and having 40% of the homes already in foreclosure or bank owned. That is the joke that everyone knows about and why no banks want to lend to each other. What happened to Bear WAS a major bank run, but it was the bankers running away! The Fed is creating endless schemes to prevent the banks from having to actually mark these securities to their value and not some bullshit modelling value that says they are golden. The ratings agencies are complicit in this, by keeping false AAA ratings on securities that by their own published standards should not have them. Why are they doing this? Because these banks are facing a liquidity crunch, or because they are insolvent? Why is the SEC, Fed, Treasury sitting around and allowing that to occur? Its provable that these ratings are junk, that if they were correctly rated the banks would face massive additional write offs, so nothing is being hidden? Give me a break! If you don’t think the Fed is playing games, guess what securities they are accepting in exchange for treasuries and a nominal haircut? These very same “AAA” rated bonds. Its a transparent joke at this point, the banks know it and thats why they are avoiding each other like the plague. This is not a lack of money available to lend, its a lack of trusting you will be paid back. The only way to solve that is transparency and proper accounting, which is the exact opposite of what the Fed’s actions for these banks have been so far. Dragging this out further with all of the Feds bullets is not going to help restore trust since nobody knows when it will blow up (and it will).
Not getting tied up in that discussion, but I favor Q-diddy’s interpretation.
Yes, the government’s actions benefit the rich more than the poor.
No, we do not universally benefit from throwing the bankers to the dogs.
Rhonda, it was a pleasure meeting you as well. It was more or less as you said at the meeting, but evidently, some of the bad news was indeed “news” to some of those in attendance.
I was interested in the presentation (it never hurts to review basics from time to time), but more so in the mood of the attendees. Perhaps the greatest comments were about the proposed changes to ordering appraisals, denying mortgage brokers and RE from directly ordering ANY appraisal connected to a loan.
Thank you for the link to the site to voice your opinion regarding the changes to appraisals.
I know there are not so many LO’s here as REs, but I urge all of the readers here to weigh in with ANY opinion regarding the propsed change. (Could you inset a link here, Rhonda?)
We can be heard above the moneyed interests in the halls of government, but ONLY if the numbers are intimidating.
Government has become accustomed to us NOT caring, NOT understanding, and NOT participating.
This must change, if we ever expect government to act in the best interest of the common citizen.
b-
Why are you so focused on the ratings of these bonds? Do you think that provisioning for losses is some automatic math formula that the banks use or the regulators enforce? Like you said, it’s a transparent joke and all the banks know it, so why does it matter that these securities are rated AAA? What were to happen if they were downgraded to junk? Do you base your belief on stuff you read/google or actual experience?
Q-Diddy,
Did you have a Wall St. Kool-Aid injection or what?
BSC just went TU because they were completely illiquid. The fifth largest broker just went under and you are claiming this is a correction? Understatement of the century. The CEO of the company was on CNBS on Wed claiming that they had no liquidity issues, and here comes friday and BOOM, all of a sudden they are frozen. Something tells me they aren’t the only ones lying to the public.
Goldman Slacks and LEH just hit the discount window last night. Why are they hitting the discount window if they have plenty of liquidity? Something doesn’t add up and the only thing that is going to help us figure out what the hell is going on is greater transparency.
Of course people “favor” what Q-Diddy is saying, if you actually looked at how deep this crisis is it would scare the living crap out of you.
Matthew-
You obviously have not read my other posts or you don’t understand the meaning of a correction or maybe you’re talking about some other correction.
Let me ask you a few questions then, Yes or No will suffice.
1. Is housing in a correction?
2. Is credit/lending in a correction?
3. Is the Gov/Fed trying to hide things?
I’ll ask you the same question I asked b: Are you basing your beliefs on what you read/google ro experience?
Q-Diddy –
Where did you get your PhD in economics and what firm do you currently work for? I assume you must manage a several billion dollar portfolio of MBS and CDS, and have an amazing source of information that is not available through Google or the worldwide financial media. I bow to your obvious skill and amazing abilities and I’ve also heard you can bench press 400lbs while reading The Economist, which is truly an amazing feat.
Here is something I think you should read which I found through Google. This argument is pointless, enjoy!
b-
I’m glad you finally asked.
No, I don’t have a PhD in Economics though I loved the subject, I have 3 degrees of which 2 is related to finance.
Yes, I did manage a $175BN portfolio of liabilities including CP, FHLB Advances, Repo, Senior/Sub Debt, Fed Funds and CDs for a large West Coast bank. This is what us in the industry typically call “Wholesale Funding” or “Short Term Liquidity.” It represent the largest borrowings of our financial system.
I get my resources from the standard in the industry – Bloomberg financial terminals. Not the bloomberg.com that any Joe can get, but the one that my company pays a good chunk of change to rent. I also get my sources from actual traders, bankers, brokers, underwriters, economist, why? Because I’m in communicaton with them everyday via phone/email.
Why do I choose to come here? To help shed some light on the topic that I know and to hear/learn from the experts in the RE industry.
Lastly, I’m not saying I know more than you or anybody else here. What I try to do is offer info based on experience rather than news.
Q-Diddy,
I day trade the equities markets, right now primarily on the short side. I also trade a small amount of FX and commodities, and occasionally trade the futures.
To answer your questions:
1. Housing is in a crisis
2. The credit markets are in a crisis
3. The Fed has failed to due their job, to regulate the credit markets. The Fed may or may not be intentionally hiding data. But I know for a fact that many of the financial firms are hiding data. There is such a lack of transparency of whats on everyone’s books right now that it is truly frightening.
Why did GS and LEH borrow against the discount window last night if they have plenty of liquidity? Put that in your bloomberg terminal for me and please give me an answer. Why did the CEO of BSC come out and say that everything was A-OK on Wed and then the company is frozen on Friday?
I answered your questions, please answer those two for me.
Matthew-
You ask some very good questions and I appreciate your answers to my questions.
First, on my earlier questions:
1. We are in a correction/crisis. I think we all can agree to that
2. The credit/lending markets are in a correction/crisis. We can all agree to that as well.
3. The Fed has failed to react to the market, although I’m not sure how anyone could have seen the magnitude. The rating agencies didn’t see, the regulators/law makers didn’t see it, the investors didn’t see it, the banks/issuers didn’t see it, the Fed didn’t see. The ones who bet right are now coming out bragging about the billions they’ve made. Great for them, this is a free market and they made the right call, so they should be rewarded. As you know, people in business take bets. Not everyone bets the same direction and not everyone wins.
You’re worried about the lack of transparency and I was too. What you have to get your arms around is that the market is already pricing that in based on the fact there is no liquidity for these assets. What I fear though is that they’ve “over shot” in other words, the market has over corrected and by doing so has taken liquidity out of the system without any rationale. When you do that it becomes self-fulfilling because assets that are otherwise safe and performing are now thrown into the same boat. If you read carefully between the lines you’ll notice that many experts use the words panic, absurd, irrational, why? Because what they’re saying is the market has essentially taken price rationality out of mark-to-market of these assets.
Take a look at loan/asset provisioning. How does that work? Banks set aside reserves/provisioning in anticipation of losses not in anticipation of rating downgrades. If you’ve been following the news, you would have seen that more and more reserves are being set aside even though the assets carry AAA ratings. Why are companies doing that if they don’t have to? b earlier said that they are trying to hide losses, but how are they if they’re provisioning increases? Yes, more provisioning may become necessary, but until the assets show further weakness in performance that’s not necessary. By forcing them to mark-to-market in an irrational market you compound the problem. Also, in an irrational market do you think it’s wise for the rating agencies to go on a limb and downgrade all the bonds? Why cause even more panic?
Thoughts on your questions:
1. Banks are borrowing from the discount window because there is no liquidity. I never said there was plenty of liquidity and I’m not sure where you got that from. Remember, what I worry about is this iliquidity is irrational. Most people in the field will tell you the same thing and you have seen how the Fed have responded. The rate cuts are intended to add as much cash into the system as possible. It’s not going to cure the mortgage mess, but it does keep the financial system lubed by encouraging banks to lend to one another.
2. The CEO from Bear came out and said nothing was wrong because he did not think that investors could possibly pull $17BN from his company in 2 days. Bear relies on the Capital Markets for their borrowings and when the rumor began all lines of credit was pulled from them – another event the CEO could not forsee. Again, irrational behavior. How can you tell it’s irrational? Look at their book value, the value of their hard assets. JPM made out with a steal of a deal! If Bear had retail deposits or the ability to borrow from the FHLB, they may not have needed to sell.
So, do you trade for a company or is it a personal account?
Matthew:
Correct me if I am wrong, but if you have your money in the “short” position, wouldn’t you benefit from a “sky is falling” scenario?
I am not a sophisticated trader by any means, but I did pull mostly out of the stock market in December, and went to bonds. So I guess I agree with you in that we are in for a prolonged market slump, and put my money on that horse.
Probably should have gone for gold, etc…but it’s just too exciting for me.
Q-
Thanks for sharing your credentials and experience. Whenever you feel like sharing more of your financial wisdom and research, please do.
Same holds true for Matthew and b, et al.
I have no idea where Ardell thought this post was going to go, but it has been both lively and informative! 🙂
Roger-
You are welcome and please do the same. 🙂
Q-
It seems to me that we are on close to the same page, however you appear to be more optimistic about the outcome. I also believe that many of the assets have not yet been marked to market. We’ll see what happens to the market when the FED decides to stop cutting. The joy last what, less than 24 hours this time? The market already plunged close to 300 pts today.
Roger,
Shorts and PUTs are mostly used to hedge portfolio’s. Some people, like myself, just play one side or the other. I’m usually either 100 percent long or 100 percent short. Yes, as the sky falls, I have been making a lot of money. My BSC PUT options traded at a premium of over 500 percent when I cashed them out. I also made a killing on CFC PUTs as well. Not everything has paid off for me, I tend to take big risks, but since April they have been paying off a lot more than I have been losing.
Q- I only trade with my own money.
Matthew-
I think the stock market is the least of the Fed’s worry right now. Their moves are about preserving the financial system not people’s stock portfolio. Your strategy of shorting the market may continue to pay off.
When the Fed stops cutting rates (I doubt they are) it will either signal 1) that they’ve done all they can to inject cash into the system or 2) the mortgage market has been restored or 3) liquidity is back to normal or 4) Fed Funds is down to zero. I pick door number 1.
BTW, were you the few lucky ones who shorted subprime?
I’ve been short anything remotely attached to subprime for a while now. I agree that the Fed is more concerned with the financial markets functioning properly than they are the equity markets. However, I don’t think that they are completely apathetic with the performance of the markets.
I think I have to disagree with respect to the FED continuing to cut. They had 2 dissenting votes this time which is very rare. The board is not nearly as united as they were a few months ago. The FED statement this time around appeared to signal a change in sentiment. We’ll have to wait and see what happens.
Matthew-
The statement gave a nod to inflation, which is to say they recognize the disent of the Dallas and Philly Fed. Put it this way, they’ve got less and less margin to curb long term inflation. However, I still see the need to cut rates for at least 1 or 2 more quarters. Not a lot though, maybe 25-50bps like futures suggest. Time will tell and the landscape could change.
Were you able to short the ABX index (BBB tranche), you’d probably be too busy spending your money right now!