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September 18, 2007 at 1:29 PM #85012September 18, 2007 at 1:34 PM #85014
carlover
ParticipantHLS,
Federal Funds rate is basically an extremely short term target rate (overnight). As such it has the greatest effect on short term loans. 3 year arms will see a larger downward influence than 5 year arms, and the correlation on a 30 year loan is basically non existant. The rate cut may indirectly lower 30 year rates through improved liquidity and willingness to lend by banks.
Since I despise statements made without data to back them up:
3 year arm history for the last 5 years, note that it mostly tracks federal funds rate, although there is a lot of interim volatility. The correlation is there but not direct, a 1% change in federal funds rate only results in around a 0.5% change in the 3/1 Arm rate:
[img_assist|nid=4842|title=3 year arm|desc=3/1 Arm mostly correlates with Fed Funds Rate|link=node|align=left|width=466|height=424]5 year arm history for the last 5 years, again it mostly tracks the federal funds rate. However the relationship is even less direct, with 1% change in rates resulting in around a 0.25% in 5/1 Arm rates:
[img_assist|nid=4843|title=5/1 Arm and Federal Funds Rate|desc=|link=node|align=left|width=466|height=424]30 year conforming history for the last 5 years. There is really no correlation here, a better estimator for long term mortgage rates are 10 year treasury yields as advocated by SD Realtor. After the rate cut today 10 year treasury yields dropped by only about 1 basis point so don’t expect to see a huge change in conforming rates. That being said rates may still come down more than usual given the higher than historical premiums over treasury yields:
[img_assist|nid=4844|title=30 Year Conforming Rates|desc=|link=node|align=left|width=466|height=424]September 18, 2007 at 1:41 PM #85016CarlsbadMtnBiker
Participant“CMB,,
I only in 4th grade right now. Thanx for the edukashen.I assume that you are a finance major with an MBA, so I will bow down to you. Can you please point out to me in your link what I am supposed to study that shows that mortgage rates are affected by FFR…
I am willing to learn.”HLS, big thx to carlover for educating you for me. Not that I would have taken the time. See his post and study hard.
September 18, 2007 at 1:42 PM #85017Alex_angel
ParticipantHLS, you are correct.
The Fed rate ahs stayed level for the last year but mortgage rates have gone up as high as 1.5% from last year. Soooooo fed rates stay the same yet mortgage rates go up. Where is the connection? There is none. Fed rate goes down today the mortgage rates will stay the same or go up some more. The banks offered a 4.5% rate when the FED rate was 1%. When the fed rate was 5% they offered mortgages at 6%. There is no relation whatsoever. The only people that benefit from this are the banks.
September 18, 2007 at 1:44 PM #85018ParticipantTodays % change increase for the homebuilders:
HOVNANIAN ENT INC [HOV] +27.63%
BEAZER HOMES USA INC [BZH] +18.69%
STANDARD PACIFIC LP [SPF] +14.09%
ORLEANS HOMEBUILDERS [OHB] +12.50%
M I HOMES INC [MHO] +11.07%
D R HORTON INC [DHI] +5.37%
LENNAR CP CL A [LEN] +2.10%
PULTE HOMES, INC. [PHM] +6.28%
GAFISA SA ADR [GFA] +3.26%
CENTEX CP [CTX] +4.35%What you say RE bears .. ?
I know it’s a long road ahead but I’ll take it.
Hard to ignore that foreclosures up 115% (nationally) since Aug. 06 but does this reduce probability of a recession? I think so.. what u say?
September 18, 2007 at 2:05 PM #85025HLS
ParticipantCOOP,
What dictates rates depends on who the ultimate buyer of the loan is, and the profit margin before it gets to them.Most loans that are conforming anount of $417K or less today, are sold to FNMA, FHLMC (or FHA at their limits)
The rates change daily and there are markups along the way, resulting in the net rate to the borrower. The 10 YR bond is an indication of which way rates “should go”, but it doesn’t control the profit margins.In addition, most people do not qualify for the best rates, which allow for greater profit margins.
Competition keeps the margins low, but the lenders that have huge exposure to risky loans on their books will need to start making larger profits to stay afloat.
(WACHOVIA may have HUGE exposure)Loans that are “portfolio” are from institutions that plan on keeping them to maturity. They usually only keep strong loans. High credit score, low LTV. Many would rather have a strong 6% loan on their books than a risky 9% loan.
Portfolio lenders need to be competitive, so on shorter term (5 years or less) they are generally in line with other lenders and will also consider jumbo loans, over $417K, however their rates often aren’t as good for terms over 5 years. Institutions that offer 5 YR CD’s know their cost of funds. It’s not worth gambling on longer terms, so their rates are higher so they can sell them off and still profit.
They also offer ARMS which keeps their return in line with their cost of funds at any given time.
In reality, if they could get deposits locked in at 5% for 5 years, they loan it out for 5 years at a higher rate.
The bonus for them is that they can loan out up to 10x what’s been deposited, but if they are keeping the loans, it raises a risk factor.
(WAMU, WELLS and WACHOVIA and others have exposure)I don’t think that any one lender has the lowest rates all the time any more than saying that one airline always has the cheapest fares.
This morning, Conforming 30 YR Fixed Fully amortized were around 5.875%-6.00% at PAR. 10 YR bond was up .01 today.
FFR was down .50, Mortgage rates my drop a tiny amount tomorrow.In a nutshell, it’s the best that I can do with my 3rd grade education. I’m guessing that CarlsbadMountainBiker will point out my errors when he has time.
September 18, 2007 at 2:10 PM #85026ParticipantBofA lowers prime-lending rate
Tuesday September 18, 3:10 pm ETBank of America Corp. has lowered its prime-lending rate to 7.75 percent from 8.25 percent, effective Tuesday.
The prime rate is a benchmark used to set interest rates on corporate and consumer credit.One of the 1st banks to do it… humm .. must be a coincidence right RE bears?? no way does this have anything to do with the fed funds rate .. ?? right HLS, Alex_Angel ?
September 18, 2007 at 2:11 PM #85028ParticipantCMB,
You are a GENIUS. Coincidence, no. It’s called MATH.I’m typing it slow, so you can understand. When FFR was 5.25%, Prime was 8.25%
I haven’t studied it yet, I’m slow, but did you forget to add that mortgage rates are affected too ??????
The prime rate is a benchmark used to set interest rates on corporate and consumer credit.
Perhaps you didn’t know, Prime is 3 points above FFR.
Let’s see 4.75% + 3.00% = 7.75 %OH MY GOSH,, you are SO right……
September 18, 2007 at 2:16 PM #85029ParticipantOH YA,,
Just to help you understand, when FFR was 1%, prime rate was 4%.. and when FFR was 2% Prime was 5% get it ??It’s not just BofA genius. It’s people EXACTLY like you that are probably on their way to BofA right now because you think that they have something special to offer.
The same mentality that withdrew money from Countrywide Bank that was FDIC insured.
I gotta go study. Somebody above suggested I needed to.
September 18, 2007 at 2:18 PM #85030ParticipantHLS, you taught yourself.. see, now, on to lesson 2. I guess I am teaching you something afterall.
study hard.
September 18, 2007 at 2:22 PM #85032ParticipantCMB….
OK…digested all that. What’s lesson 2 ??
September 18, 2007 at 2:30 PM #85033(former)FormerSanDiegan
ParticipantIt’s pretty clear that Fed Funds rate correlates with short term rates as shown above. The reason is that it correlates strongly with the 1-year LIBOR, an index commonly used for ARM loans.
Below is a hack job on a chart (no time to find data and do my own excel job).
HLS – Your statement is true regarding FFR being a poor indicator or predictor for 30-year fixed rates. However, ADJUSTABLE rates are strongly affected by FFR. And I think we have found over the past few years that adjustable rate mortgages can have a profound impact on housing.
[img_assist|nid=4846|title=Crappy chart|desc=Do Fed Funds rate correlate with indexes commonly used in Mortages ? They sure do.|link=node|align=left|width=466|height=349]
September 18, 2007 at 2:31 PM #85037Sandi Egan
ParticipantBank of America Corp. has lowered its prime-lending rate to 7.75 percent from 8.25 percent, effective Tuesday.
I am as ignorant on these topics as the next guy, but isn’t prime rate the rate at which the bank lends short-term money to credit cards and such rather than mortgage?September 18, 2007 at 2:34 PM #85035Participant“CMB….
OK…digested all that. What’s lesson 2 ??”
Ok HLS….,
Commodities, currencies, oil and inflation. It’s tough and I am still learning my self. alot of them are moving against the dollar.
hint: cheaper $$ = higher asset values.
That should keep u busy for awhile and its interesting. Check in with me next week. Study that chart by FormerSD above too.
September 18, 2007 at 2:36 PM #85039ParticipantBank of America Corp. has lowered its prime-lending rate to 7.75 percent from 8.25 percent, effective Tuesday.
One would be naive to think BofA is the only one to have done this. All the major institutions have done this or soon will.
I am as ignorant on these topics as the next guy, but isn’t prime rate the rate at which the bank lends short-term money to credit cards and such rather than mortgage?
The prime rate is typically used DIRECTLY to set HELOC rates, and usually contractually tied to the rate for a HELOC.
Credit card rates are not strictly tied to prime rate and are not set in stone. Banks may change the rate unilaterally, with some restrictions regarding notice to the customer. However, CC rates tend to track the prime rate as well.
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