Wednesday, September 19, 2007

Alert, Alert! The Basil Group news on The Fed's rate cut

They lowered the Fed Funds rate a half point from 5.25% to 4.75%. This is the rate that rose constantly under former Fed Chairman Greenspan to ward off inflation. This rate is what banks charge each other on overnight loans, and is the basis for the Prime rate, which is the basis for credit card rates, business loans, and rates on Home Equity Lines of Credit (HELOCs). It is also used by some mortgage lenders as a foundation for fixed-rate second mortgage rates. It does not, by itself, have much influence on first mortgage rates, which is by far the largest piece of the home financing pie. Mortgage rates are more influenced by macro economic factors such as employment/unemployment, consumer spending, and projections for growth in gross national product. That being said, some mortgage lenders have already tweaked rates downward a hair in the last half hour.

The Fed also lowered the Discount Rate by a half point from 6.25% to 5.75%. This is the second 1/2 point reduction in this rate in five weeks. The Discount Rate is what the Fed directly charges member banks for short-term loans. While the reduction in this rate should help provide more financial liquidity, it has a lesser effect on mortgage rates.

These rate reductions have caused the stock market to soar to where the DOW was recently up 250 points. It was up earlier on anticipation of the cuts. The Fed commented that it does not want the housing slump to spread throughout the economy. While it remains to be seen what the longer term effect on mortgage rates will be, the Fed's action cannot be anything but positive for the economy, and housing.

Who do you know that's thinking of moving in the next 6 months? Feel free to send them this article...