My New Blog

The Fed’s reiterated on New Year’s Eve day that they intend to buy $500 Billion in mortgage backed securities between January and June this year. This action should bring down interest rates even further than where we currently are. At the conclusion of the last fed meeting, they made it crystal clear that they would use the resources available to them to buy the rate down. While rumored that the rate would somehow only be available to purchase homes, it appears that the rate will go down for every home owner. The same day that the Fed’s came out with the statement, Fannie Mae and Freddie Mac (now nearly government agencies) came out with a new series of add-ons for refinancing loans where the mortgage amount is greater than 70% of the appraised value. These additional costs would put someone refinancing into a rate that will be an eighth to a quarter of a percentage point higher than someone purchasing a home. Still if the fed’s hit their target rate of 4.5%, the rate for refinancing should range from 4.5% for the perfect credit score and a loan to value under 60%, to 4.75% for cash out refinances up to 85% of the appraised value. This will likely free up billions of dollars in disposable income as an average home owner could save $150 per month on a $200,000 mortgage!

I applaud the Fed’s decision. The t-bill rates are near zero on short term issuances and the rumor is that 4.5% for a 30 year fixed rate is their target rate. If they are borrowing money at 0 -3% and lending it out at 4.5%, the government bail-out will cost the US tax payers nothing and may in fact make money while fueling the recovery. If they lend out all $500 Billion, the arbitrage (difference in rate for borrowing verses lending) could make the government $150 Million per year!

Next week, we should see how the market absorbs this information.