The Veridian Blog

Hi all -

In case you have been travelling in outer space, the Fed decreased the Discount Rate last Friday by 0.50%.  No, this doesn't mean that the Ben Bernanke Bobbleheads are now half-price - it means that the Fed is now lending money to the nation's banks and lenders at a cheaper rate than they were a week ago, in hopes of improving liquidity in the secondary market.  The Fed Funds rate (the rate banks charge each other) will follow suit during the next Fed meeting on September 18.  Almost always, the Prime Rate (what the banks charge the best customers - you) follows accordingly.

Despite a 50 basis point drop in the benchmark 10-year note during the last 2 weeks, mortgage rates have risen dramatically - why?  Usually the mortgage rates move in lock-step with the 10-year note.  In laymans terms, this simply means that lenders don't trust borrowers as much as they used to.  Even though the rate of return on lending to the US government has gone down, there is too much risk to put money with borrowers who are defaulting in record numbers.  Soooo much risk that they are asking for bigger spreads to compensate.  That's the theory - but it is frightening to see the pace at which this has occurred.

What has happened in a nutshell:

All Jumbo and 2nd mortgage products have been significantly hit - even for A-paper borrowers.  Some lenders have opted to disband with these programs entirely.  All subprime, Alt-A and reduced documentation loan programs are subject to intense scrutiny, if available at all.

What's next?

We believe this situation is "temporary" - meaning that it will resolve itself within the next 6-12 months.  It does not make economic sense for A-paper borrowers to suffer from the subprime plight and we anticipate the secondary market to eventually come to its senses.  It's simply the power of supply and demand that will pull investors back.  In addition, the Fed will do what is necessary to avoid a total housing meltdown and subsequent recession.

If you have an intermediate-ARM that is set to convert after such time, we strongly advise against refinancing until absolutely necessary. 

Please call us for more detailed information, or just call to say hello!