Atlantic Home Loans

This is an article that was written recently regarding the divisions within the Fed:

The Federal Reserve’s policy-making committee is increasingly divided between advocates for stronger steps to bolster the economy and dissenters who see little benefit and considerable risk in such efforts, according to minutes of the committee’s most recent meeting.

The Federal Open Market Committee voted at the end of a two-day meeting in September to begin an effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.

The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.

The internal divisions were partly the product of a lack of clarity about the health of the economy. In its predictions since the end of the recession, the Fed has repeatedly overestimated the pace of economic growth, and the minutes report that the board does not understand why it has been wrong.

“It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear,” the minutes said.

The Fed noted that labor market conditions in particular had been disappointing, with companies adding fewer workers than expected. It also noted that both consumers and businesses remained surprisingly pessimistic.

In response to evidence that the economy is growing slowly, at best, the Fed announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities.

The Fed’s chairman, Ben S. Bernanke, has said since the decision was announced that the central bank is willing to act again if necessary, but also that there would be a high bar. In particular, he has said that the Fed was most likely to act if the pace of inflation abated to the point where there was a risk that prices and wages might begin to decline. Such a trend, known as deflation, can cause buyers to delay purchases, derailing the economy.

The minutes, which are normally released three weeks after a policy decision, made clear that the Fed had not changed its view that the pace of inflation was likely to remain at roughly 2 percent a year, the rate that the Fed considers most healthy.

“Participants generally judged that there was relatively little risk of deflation,” the minutes said.

That suggests that the central bank is unlikely to seriously consider another round of asset purchases, the most powerful arrow left in its quiver.

The minutes do note that “a number of participants” said that they regarded asset purchases as “a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”

The minutes do not disclose the names of the two members who favored stronger action, although one obvious candidate is Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has argued publicly that the Fed should move more aggressively to stimulate the flagging economy.

The names of the three dissenters, however, are public: Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. They argued that the Fed’s actions were unlikely to help the economy and would increase the chances of a faster pace of inflation.

The Federal Reserve just unleashed its latest ploy to drive interest rates lower in an effort to get the economy moving.  This latest move, called “the twist” involves the feds selling short term securities, and using that money to buy longer term securities.  Buying these securities will drive yields lower, with fixed mortgage rates following suit.  Thus far, we’ve seen mortgage rates improve by an .125-.25%.  Now granted, this might allow a certain number of people with a mortgage rate in the high 4 to low 5% range to refinance, but this segment is made up of people who aren’t in financial duress, and have already benifitted by refinancing within the past two years.  The homeowners that need help are those with mortgages underwater,  or have seen their income decline as a result of the flagging enconomy.  You might think that the government created all sorts of special programs to help these homeowners, but these programs either don’t go far enough, or banks won’t take the risk to write the loans, even though federally backed institutions such as FannieMae will take them off their books.  Fannie Mae has what’s called in the industry, recourse, meaning that if the loan defaults, the original lender may be forced to buy it back.  Take for instance the “refi-plus” program that was established by the government nearly two years ago.  This program allows homeowners to refinance up to 125% of their home’s value, however very few mortgage lenders will approve a loan that exceeds 105%.

There are thousands of homeowners who have either demonstrated the ability to make their current mortgage payment on time, but don’t have sufficient equity or income to meet underwriting standards, or those who meet the income or equity standards , but have blemished credit histories.  The government could easily create programs to assist these homeowners, while giving banks the confidence to lend.  This would free up millions of dollars of disposable income, while substantially reducing the number of short-sales on the market, which is vital to stabilizing the housing market.

The success of the mortgage business is dependent upon a stable housing market, stable employment, and strong consumer confidence. So it’s a strange paradox that we love stock market meltdowns, sovereign debt defaults, natural disasters, war, political coups, and any other world-wide turmoil you can think of.

While these things don’t promote a stable economic environment, they do cause interest rates to plummet. You see, interest rates are tied to the US government bond market, which is considered an investment safe haven in times of economic turbulence. Investor’s money flocks to US treasuries when there is market uncertainty, which drives the prices of treasuries higher, and mortgage interest rates lower (that’s a paradox to explain in another blog post). This drives mortgage rates to new lows, and gives homeowners the opportunity to save a significant amount of money by refinancing their mortgage, or purchase a home while locking in at a historically low rate.

So, the next time you see a stock market collapse, a country defaulting on their debt, or citizens overthrowing an oppressive government, pick up the phone and call your local mortgage banker. It may be time for you to refinance your mortgage, or purchase a new home.