Will the Fed rate cut make a difference?

[disneysteve]

I'm no economist but I fail to see how the Fed rate cut will fix anything. The problem isn't that rates are too high. The problem is that lenders aren't lending and have tightened up lending requirements - higher FICO scores, larger downpayments, etc. Apparently, Chrysler dealers are reporting that 1 in 4 potential buyers has gotten turned down for a loan. That has nothing to do with the interest rate. It has to do with the lending criteria. People are looking to borrow money but can't. Credit cards are decreasing credit limits. Banks are freezing home equity lines. It doesn't seem to me that a lower interest rate will reverse all of that.

What am I missing here?

[gamecock43]

It's helping me!! I just bought a house yesterday- and our lender told us they will review our paperwork and maybe we can get 1/2 % lower interest payment...saving us about $15,000 over the next 30 years!...BTW- Trust me, I understand about banks still not giving out loans...but our bank said they had processed 10 mortgages that day at the lower interest rate- so maybe that has boosted confidence in bank lending.

[Hot dog]

so what is the interest rate now for a 30 year loan? Is it time to refinance?

[disneysteve]

I certainly understand why a lower rate will help people who DO get a loan. What I don't understand is how it would help people get a loan in the first place. A lower rate may get more people to apply, but will it result in more people getting approved (or qualifying for that newly lowered rate)?

[Investing First Steps]

I think the bigger (and mostly lost) point in what Bernake said was that the fed would start buying assets. So if you're a bank you can essentially borrow money at close to 0%, loan it out at whatever rate, and then sell the paper to the Fed. I think that's probably the facility that's more likely to result in an increase in credit-flow. Whether it's a good policy economically remains to be seen, to say the least.

[disneysteve]

I think the bigger (and mostly lost) point in what Bernake said was that the fed would start buying assets. So if you're a bank you can essentially borrow money at close to 0%, loan it out at whatever rate, and then sell the paper to the Fed. I think that's probably the facility that's more likely to result in an increase in credit-flow. Whether it's a good policy economically remains to be seen, to say the least.

Let's see. Isn't that what caused all this trouble in the first place? Banks making ridiculous loans and then turning around and selling them so they were off the hook when the borrower defaulted.

We should be encouraging fiscal responsibility. We should be requiring larger downpayments and lower debt to income ratios. We should be restricting loans to folks with poor credit. We should be demanding proof of income and ability to repay what is being borrowed.

[Broken Arrow]

Well, the basic idea is that the lower the interest rate, the easier it is for people to be able to pay their loans. Therefore, the lower the perceived risk.

However, as some pundits have pointed out, this sort of economic policy is akin to "pushing on a string". Giving it more slack doesn't always push things along.

In normal environments, such a policy would have been enough get things moving again, but these are extraordinary times.... Lenders are still too scared to lend because they don't see signs that the economy has improved. So, they have opted to shore up their defenses instead.

And that's why I'm glad that the Fed went ahead and just dumped the whole interest rate to 0%, and are planning to take even more drastic measures.

I also prefer to look at this in terms of personal economy rather than the macro-economy. If you are someone who has good credit and a decent amount of cash set aside, this truly is a buyer's market. This is your world, your time! Tell me you can't get a good deal on cars right now. Or houses. Or good investments at a good price.

It's the Joneses who have been living fat on debts with no cash that are going to suffer the most. They won't qualify for anything, and they probably don't have the cash to buy into this market. A market filled with so many opportunities and sales.

It's good to be a saver right now.

[gamecock43]

I just got off the phone with our bank about getting a mortgage loan and suddenly they are flooded. She said she cannot close in even 30 days because the paperwork is expected to take a week to get to the underwriters.

And suddenly income that I had that did not previously count...is counting. This bank has loosened up its standards it seems.

[rooskers]

I can only speak for myself if the interest rate cut with cause me to spend more. No it won't.

I can't get a lower rate on my mortgage with a refi because I bought within my means and the values around my neighborhood took such a huge hit that I owe more than the house is worth. We have some friends who bought way out of their means and even though they make more than us they were able to refinance because they showed their lender they could not really afford the payments. I guess we should have opted for the McMansion after all.

I own both of my cars and they are running great and have another 5-10 years of life in them. So I won't be going out to get a car anytime soon.

Gas is down now but it hadn't been for most of the year. Groceries had also increased in price most of the year as have other things. This means that there has been no extra money and so now with this little relief in gas prices we have been trying to shore up our emergency fund. This means no extra spending to help boost the economy.

So did the rate cut help me or influence me to spend more? NO.

[disneysteve]

I just got off the phone with our bank about getting a mortgage loan and suddenly they are flooded.

A lot of that is probably refi business. Lots of folks out there anxious to get out of bad loans. I'm watching the rates myself. If I could refi under 5%, it might be worth it.

[sweeps]

The Fed's rate cut doesn't affect mortgage rates. If anything Fed's cuts to short-term rates can actually RAISE mortgage rates, because it can stoke concerns about inflation.

Having said that I would believe that mortgage brokers are swamped right now because when people hear about the Fed cutting rates, they think that is pushing down mortgage rates and want to get in on the action.

One thing to look out for is... reportedly the Obama administration may be working with the Fed to forcibly lower mortgage rates down to 4.5% or so from what I hear. If this happens obviously it would be better to wait to refinance.

[TBH]

I never thought I'd think about refinancing, but if the rates go down to 4.5 I might consider it. Problem is my loan is so small nobody would touch it. And I know that mythical 4.5 fixed rate might only be for a certain category of people, like first-timers or people getting out of ARMs or some such thing.

[cptacek]

We have most of our business loans at 7.25% and we just heard that some banks are offering 6% loans on these business loans. I am going to call my banker tomorrow to see if we can refinance to the lower rate.

But I agree, Steve, that the Fed is at the end of their rope. They don't have any other way to encourage lending, and lowering the rate to 0% is kind of scary to me. I mean, if that doesn't work, will they go "ok, that didn't work. Let's try raising it and see what happens"?

[Broken Arrow]

But I agree, Steve, that the Fed is at the end of their rope. They don't have any other way to encourage lending, and lowering the rate to 0% is kind of scary to me. I mean, if that doesn't work, will they go "ok, that didn't work. Let's try raising it and see what happens"?

Well, last I heard, the Fed said that they plan to keep this 0% interest rate where they are for a while (and we're talking in term of years). They also came straight out, right after the 0% interest rate announcement, that they have not exhausted their options yet, and are now resorting to less-conventional, more drastic means.

Buying shares in companies, perhaps even MBS, as sweeps has alluded, to "force" the mortgage industry to push down their interest rates for example. Now, what they end up doing and whether it will actually work or not is subject to debate and speculation, as only time will tell.

The truth is, the Fed hasn't done a lot of buying into Trouble Assets just yet. I'm not sure why. Perhaps they are being measured in their steps, because this is new territory that they are stepping into, and the repercussions will be felt and studied for years if not decades to come.

But as I have mentioned earlier, macro-economy aside, we are far from the ends of our own ropes. Quite the contrary, some are certain to thrive in this climate while others are certain to suffer. Let us be one of those who thrives.

[rooskers]

The Fed's rate cut doesn't affect mortgage rates. If anything Fed's cuts to short-term rates can actually RAISE mortgage rates, because it can stoke concerns about inflation.

Normally I would agree with you but it seems we are in a unique situation. The Fed's rate cut affects banks lending to banks and since this amount has been lowered and other factors banks seem to be thawing out the credit freeze. This means now banks are more willing to lend to consumers, house buyers, refi, business loans and such. I believe the 30 mortgage rate is closely tied to the 10 year treasury and LIBOR and since those have both dropped dramatically mortgage rates and refi rates are at an all time low. So the combination of the two have made refinancing look great because banks are now willing to lend and the refi rates are lower.