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Friday, August 17, 2007

Sub-Prime Mortgage Crisis Causes Fed to Lower Discount Rate

Arizona real estate market has its ups and downs. Will lowering interest rates help the housing market recover? The Federal Reserve just lowered its discount rate by a half a point to 5.25% after continuous bad news from the mortgage industry and Wall Street.  The discount rate is the rate the Federal Reserve charges qualified lenders, usually banks, for temporary loans.  This move is mostly symbolic, as the Fed did NOT lower the federal funds rate as many expect will happen in September, and perhaps again in October (the federal funds rate is the more closely watched 'interest rate' which affects credit cards, home equity lines of credit, car loans, other consumer loans and eventually mortgage rates).  But obviously, the Fed is now MUCH more worried about the credit crunch than about inflation.  What started as a subprime mortgage problem is now wreaking havoc on Wall Street and the economy as a whole.

As a Realtor®, lower interest rates would obviously make me happy.  Lower rates will decrease a buyer's monthly mortgage payment, therefore enabling more people to qualify and buy real estate.  But will lower interest rates really help solve the mortgage problem, or will it just create more inflationary worries?  And as mortgage companies tighten lending standards, will new buyers who qualify due to lower interest rates even be enough to offset those buyers who no longer qualify due to tighter lending requirements?

It's not that lenders don't want to lend - trust me, they WANT to make loans available.  But the loans have to meet certain requirements or the mortgage company cannot sell them and free up money to lend to the next borrower.  So mortgage lenders are faced with a choice:

  • Make conforming loans that Fannie Mae and Freddie Mac will buy, or
  • Risk NOT being able to sell their loans in the secondary market

As more and more of these risky loans go into default, there are less people willing to buy them.  Investors are pretty scared right now, as indicated by the big sell-offs on Wall Street over the past few weeks.  While there are definitely reasons to be concerned, I personally feel the media attention has made this problem out to be much worse than it really is.  If you believe what you hear on TV and read in the newspaper, mortgage companies are closing their doors.  Some really are, but it's still possible for someone with good credit and good income to get a mortgage (and shouldn't good credit and good income have been a requirement all along, really?).  But don't expect to find the 100% financing and 103% financing of years past.  If you plan to apply for a mortgage anytime soon, start saving now because you'll likely be expected to make a significant downpayment.  You'll also probably be expected to document your income.  Why?  Because people with good credit, good income and a large down payment invested DON'T generally walk away from their house/mortgage when things get tough.  On the other hand, people who put no money down and have so-so credit have very little to lose, and therefore can walk away from their home (and their mortgage debt) as if they were renters.

In the short-term, stricter yet common sense lending requirements will cause panic and fear, and yes, fewer people will qualify for a mortgage.  But in the long run, stricter requirements will help make for a more stable lending environment, and ultimately a more stable real estate market.

Visit Shannon Hubbard's Home Page     Written By: Shannon Hubbard

Great American Realty, Inc.

Cell: (480) 695-6672
Email me

Posted by Shannon Hubbard, AZ Realtor & Computer Guru on August 17, 2007 | Permalink


Shannon, nice article, and good advice to anyone considering a new mortgage out there.

Posted by: Steve Belt | Aug 17, 2007 10:10:13 PM

Good article. These safer lending strategies will be better in the long run.

Posted by: jon | Oct 16, 2007 11:38:42 PM

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