If fed cuts today, what will that do to mortgage rates?

[JohnDoe]

Any predictions?

[Retire Soon]

Probably not much immediate effect. Mortages are closely tied to 10 year treasuries, and the Fed Funds rate cut will only have an effect on short term rates.

[brewer12345]

Which flavor of mortgage did you have in mind? May not mean much to fixed mortgages, but 6 month, 1 year, etc. ARMs will see a big benefit.

[ProspectiveBum]

Quote:

Originally Posted by brewer12345 Which flavor of mortgage did you have in mind? May not mean much to fixed mortgages, but 6 month, 1 year, etc. ARMs will see a big benefit.

That'll kick-start the housing market! Bye-bye recession depression!

[brewer12345]

Quote:

Originally Posted by ProspectiveBum That'll kick-start the housing market! Bye-bye recession depression!

There is a bloomberg article floating around mentioning the fact that all these rate cuts mean that there may not be an upward reset of ARM rates when the teaser period ends. Bernanke 1 Paulson 0.

[mathjak107]

bonds took a big hit after the rate announcement and spiked up before recoving and dropping about 1/2 way down.

these rate cuts may actually cause fixed rate mortgages to rise as the fear of inflation keeps them up

[growing_older]

ARMs tied to Prime got a .75 reduction last week and another .5 reduction today. Sweet. If you're tied to something else the effect will be muted.

[audreyh1]

Are any ARMs tied to Prime?

Audrey

[jazz4cash]

Quote:

Originally Posted by audreyh1 Are any ARMs tied to Prime? Audrey

I had a Wachovia HELOC that was pegged to prime-1/2 which I traded for a fixed loan last summer. I've seen others that were prime-3/4

[growing_older]

Well, mine is. I guess I assumed since I had one they were somewhat common. Maybe not? I never did a poll.

[mathjak107]

arms are pegged to short term rates. conventional mortgages are not. they are tied to other indexes that use longer term bonds or costs. rightnow short term rates have been cut drastically, longer rates are actually up a hair

[brewer12345]

Quote:

Originally Posted by audreyh1 Are any ARMs tied to Prime? Audrey

Not that I am aware. Usually just HELOCs are tied to rime. But ARMs are usually tied t o stuff that stays pretty tight with the fed funds/prime rates: MTA, COFI, CODI, CMT, LIBOR, etc. If you are actually interested in the details, there is more than you ever wanted to know about these rate indexes here: Mortgage-X ~ Everything There Is To Know About Mortgage Loans

[jblack]

Following the additional rate cut, 15yr fixed down 1/4 to 5.0% today at PenFed

But as previously pointed out elsewhere, probably more tied to the 10yr treasury that is also down a bit

[audreyh1]

Quote:

Originally Posted by brewer12345 Not that I am aware. Usually just HELOCs are tied to rime. But ARMs are usually tied t o stuff that stays pretty tight with the fed funds/prime rates: MTA, COFI, CODI, CMT, LIBOR, etc.

I didn't think any ARMs were tied to Prime. Just wanted to be sure.

I usually hear LIBOR, and that is partly dependent on European rates from what I understand.

Audrey

[brewer12345]

Quote:

Originally Posted by audreyh1 I usually here LIBOR, and that is partly dependent on European rates from what I understand. Audrey

Nope, not tied to European rates. LIBOR is the rate at which the big money center banks agree to lend to each other for a given term (one day, one month, three months, one year, etc.) in a particular currency (dollar, pound, Euro, etc.). Its set by auction, once a day. Usually, LIBOR rates track fed funds and/or the shhort term T bill pretty closely. Things got really wacky in the second half of last year, but usually you can figure dollar LIBOR being within 1/4 or 1/2% within fed funds.

[audreyh1]

Oh, OK. I guess I had read something to the effect that adjustable rate mortgages hadn't come down much (late last year) because the Europeans (or was it the British) hadn't lowered their interest rate, and that this somehow affected LIBOR.

Audrey

[brewer12345]

Quote:

Originally Posted by audreyh1 Oh, OK. I guess I had read something to the effect that adjustable rate mortgages hadn't come down much (late last year) because the Europeans (or was it the British) hadn't lowered their interest rate, and that this somehow affected LIBOR. Audrey

Uh, maybe true for mortgage rates in Europe.

[audreyh1]

Thanks for setting me straight.

Audrey

[JohnDoe]

Would it better to refi in my name only or do it jointly with my wife's name on the mortgage too?

[Independent]

Quote:

Originally Posted by brewer12345 There is a bloomberg article floating around mentioning the fact that all these rate cuts mean that there may not be an upward reset of ARM rates when the teaser period ends. Bernanke 1 Paulson 0.

I don't have an ARM, so I haven't been paying attention. I also figured that the Fed controls very short term rates, it only "influences" longer rates. But, after the last rate cut I had to look this up.

What I've been hearing on the news made me think something like this: "People got ARMs in 2005 at low rates. Lots of them were 3-year resets. Since then, the index rates have gone up. But since the ARMs don't reset until 2008, borrower's payments have been fixed. When the ARM resets, payments will shoot up, and borrowers will be in trouble."

Some of these loans use the 3 year treasury as the index, so here are some 3 year constant maturity rates per FRED,
Feb 4, 2005: 3.46%
Jul 6, 2007: 4.95%

That's a ratio of 1.43. On a "non-teaser" amortizing mortgage the payments will go up less than 43%, but if the initial rate had a teaser margin, you could see a payment jump in this neighborhood. So last July it looked like these 2005 borrowers were in trouble.

But these mortgages didn't reset last July. Since then the Fed has been driving fed funds rates down, and 3 year treasuries have followed. So here is the latest rate:

Jan 25, 2008: 2.21%

Unless I'm missing something, a "plain vanilla" 3 year ARM originated in Feb 2005 is likely to reset for a lower payment in Feb 2008. If the teaser amounted to "understating" the initial rate by 1%, it's still going to reset lower.

The Fed isn't exactly sending borrowers checks, but seems to be doing something that's almost as good.


http://research.stlouisfed.org/fred2/data/WGS3YR.txt