Federal Reserve & Interest Rates

Yesterday at the Federal Open Market Committee (FOMC) meeting to major cuts were made. The long awaited federal funds rate was reduced by ½% and an additional ½% cut was made to the discount rate, which was also cut back in August.

The FOMC made this decision largely because of the risk of recession. According to yesterday’s statement, the action was intended to prevent the adverse effects on the overall economy. It was to stop problems “that might otherwise arise from the disruptions in financial markets.” The FOMC also stated that the move would “promote moderate growth over time.”

While market performance is on the rise, “the Committee judges that some inflation risks remain…” They have to deal with one problem at a time.

The FOMC will be keeping a close eye on inflation in the coming months. If there is another action that can be taken to keep pricing down, they will certainly consider it.

There are some questions about how this will affect borrowers. Apparently, this cut will liquidate the markets and keep the economy out of a recession for now, but it is highly unlikely that banks will be lowering the interest rates on loans, mortgages and credit cards. While a good move for the general economy, borrowers aren’t getting direct relief from high rates.

The economy, while quasi-stable at this time, is still in need of help. Remember, the major cause of the market downfalls was the fact that there is a severe amount of sub-prime mortgage lenders losing investments on individuals who just can’t afford their payments. With foreclosures still at an incline, something more direct will have to be done in the future.

The problem is not, however, being ignored. Earlier this month, September 4th, the following statement was released:

“Federal Financial Regulatory Agencies and CSBS Issue Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages

The federal financial regulatory agencies and the Conference of State Bank Supervisors (CSBS) on Tuesday issued a statement encouraging federally regulated financial institutions and state-supervised entities that service securitized residential mortgages to review to determine the full extent of their authority under pooling and servicing agreements to identify borrowers at risk of default and pursue appropriate loss mitigation strategies designed to preserve homeownership.

Significant numbers of hybrid adjustable-rate mortgages will reset throughout the remainder of this year and next. Many subprime and other mortgage loans have been transferred into securitization trusts that are governed by pooling and servicing agreements. These agreements may allow servicers to contact borrowers at risk of default, assess whether default is reasonably foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations. Servicers may have the flexibility to contact borrowers in advance of loan resets.

Appropriate loss mitigation strategies may include, for example, loan modifications, deferral of payments, or a reduction of principal. In addition, institutions should consider referring appropriate borrowers to qualified homeownership counseling services that may be able to work with all parties to avoid unnecessary foreclosures.

The statement, which was issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration, and CSBS, is attached.”

Hopefully, the strategy will help lenders to identify borrowers at risk of foreclosure before delinquency, and therefore help people retain ownership of their homes. This will in turn help lenders to maintain the return on mortgages, and keep the overall economy out of a credit crunch.

With the next scheduled FOMC meeting more than a month away, it is in the hopes of everyone that this action will stabilize the economy and promote future growth.