Many saw Friday morning’s surprise action by the Fed as a move that saved the day in terms of the financial markets…at least for now. What was the surprise move exactly? It was actually a doubly good surprise, consisting of two specific actions by the Fed, designed to help ease some of the current fears in the financial markets.
First, a .50% cut to the Discount Rate, taking it from 6.25% down to 5.75%. This is the rate at which the Fed lends money directly to commercial banks, credit unions, savings & loans, and also including large mortgage bankers. Now this is a different rate than the Fed Funds Rate – which is the rate at which banks lend money to other banks, currently at 5.25% – and is the rate generally discussed in terms of cuts or hikes surrounding normally scheduled Fed meetings. Note, the Fed’s move to cut the Discount Rate has no impact on mortgage rates or consumer rates like home equity lines of credit. The Discount Rate is generally above the Fed Funds Rate, which does make borrowing money from the Fed a last resort for lending institutions, as they would generally borrow from other banks at a lower rate. However, with the current liquidity situation making that more difficult by the day, the Fed’s move will help provide lending institutions more liquidity at more desirable rates in the short term.
Next, the Fed extended the borrowing period on these funds from overnight to thirty days – which could allow some lenders to use this money for funding home loans, in case their other sources are backing off. It will also allow time for the credit markets overall to settle out a bit, and this move will help financial institutions better weather the current storm. In fact, Stocks loved the news – particularly financial stocks – and the Stock market rocketed higher on the good news. Bonds and conforming home loan rates were volatile throughout the week, but ended up unchanged to slightly improved overall.
– Patrick Dunn, Westwood Mortgage Inc. & MMG Weekly
patrick@westwoodmortgage.com