Fed's "Bad Bank" Plan
On Wednesday, the Fed announced that it decided to keep the Fed Funds Rate steady at the current 0 - .25% range, the lowest ever. They also indicated that "economic conditions are likely to warrant exceptionally low levels of the Federal Funds Rate for some time" and that "inflation pressures will remain subdued in coming quarters".
Also last week, the Federal Deposit Insurance Corp (FDIC) announced that it may set up a "bad bank" as a vehicle to buy toxic or illiquid assets from banks. What does a "bad bank" do? Lenders and the entire financial sector are struggling with "mark-to-market" accounting issues, and in the absence of a repair of the mark-to-market system (see Jan 22 blog post) , lenders are forced to sell assets in a market where there are few buyers. Hence the bad bank plan, to create an entity that will purchase the assets that no one else will buy, which is yet another very creative way for the government to breathe life back into the financial sector. This action is not finalized, so we'll keep watching closely to see how it plays out in the days ahead.
Existing Home Sales came in a bit better than expected, but 4th Quarter Gross Domestic Product (GDP) numbers showed the economy contracted in the 4th quarter, as you can see in the chart above. While the numbers were better than estimates, the economy was still at its slowest pace in 26 years.
Last week was indeed action packed, and Bonds and home loan rates felt the effect, with rates ending the week about .25% worse than where they began. 30 year fixed rate conforming loans are still some of the best we have seen in recent history hovering around 5%. A 3/1 ARM can be found as low as 4.75%. One thing to keep in mind these days regarding mortgage rates, banks are beginning to look harder at individual applicants and their credit worthiness. With banks running scared, loans are being quoted on a client by client basis. The better risk you are, the better rates you can get, and visa versa.
Also last week, the Federal Deposit Insurance Corp (FDIC) announced that it may set up a "bad bank" as a vehicle to buy toxic or illiquid assets from banks. What does a "bad bank" do? Lenders and the entire financial sector are struggling with "mark-to-market" accounting issues, and in the absence of a repair of the mark-to-market system (see Jan 22 blog post) , lenders are forced to sell assets in a market where there are few buyers. Hence the bad bank plan, to create an entity that will purchase the assets that no one else will buy, which is yet another very creative way for the government to breathe life back into the financial sector. This action is not finalized, so we'll keep watching closely to see how it plays out in the days ahead.
Existing Home Sales came in a bit better than expected, but 4th Quarter Gross Domestic Product (GDP) numbers showed the economy contracted in the 4th quarter, as you can see in the chart above. While the numbers were better than estimates, the economy was still at its slowest pace in 26 years.
Last week was indeed action packed, and Bonds and home loan rates felt the effect, with rates ending the week about .25% worse than where they began. 30 year fixed rate conforming loans are still some of the best we have seen in recent history hovering around 5%. A 3/1 ARM can be found as low as 4.75%. One thing to keep in mind these days regarding mortgage rates, banks are beginning to look harder at individual applicants and their credit worthiness. With banks running scared, loans are being quoted on a client by client basis. The better risk you are, the better rates you can get, and visa versa.
posted by Chris Haviland at
11:26 AM
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