April 22, 2008
– Comments (7)
Umm, maybe not.
Click here and you should be able to get to the bigger one.
Great graph. Looks like monetary policy is not going to get us out of this one. You think the Fed is increasing the spread just to try and stabilize the financials? What other purpose would it serve except to reduce the value of the bad debt in real terms by increasing inflation?
Don't you guys have variable rate mortgages in US?
Of course, fixed rates mortgages don't move in sync with the FF rate, but the variable ones do. At least here. The BoC lowered our equivalent of the FF rate by 50 bpp today, and I expect variable rate mortgages to go down 50 bpp too by tomorrow. Not really sure exactly how the 1Yr ARM or 5:1 ARM behave, but you probably have variable rates.
Well, it seems like variable rate mortgages aren't avalaible in US. It's a real pity.
On a side note, it's crazy how complicated your system is. And how many different fees you can be charged. You shouldn't need an accounting degree to get a mortgage.
No wonder you guys got in this kind of mess. Your big banks seems about as honest as our shylock, and the basic products that can keep a market somewhat rational are not even offered to the consumers.
"You think the Fed is increasing the spread just to try and stabilize the financials?"
It's not about the American consumer. It's about the banks. The tax rebate is as much to help people catch up on their delinquent mortgages and buy the banks more time as it is for people to blow it on Chinese-made goods
The banks buy the congressmen. Just look up the campaign contributions.
Yeah, the rate drops are never about mortgages really. They just get glossed that way by folks who are looking to paint a pretty picture. As the graph above clearly shows, the mortgage rates only follow Fed funds down the hole so far, and they're trending up now why?
Could it be that the lenders don't really want to loan so low with inflation on the rampage? Why would anyone drop rates too far knowing that the script people pay back might be worth a ton less?
We have variable rate mortgages in the U.S.. They are called "adjustable-rate mortgages". The mortgages can adjust on varying schedules, usually once every six months or once a year. The thing is, the adjustable rate mortgages aren't tied to the Fed Funds rate. They are usually tied to 10-year Treasury notes, plus some number of points. (About 1-1/2 points is normal from my experience.) The mortgage problem can't be solved directly by the Fed since the Fed does not set the rate on the 10-year Treasury note. That interest rate is set by the market, and if the market thinks that inflation is coming, they will push up the interest rate on the 10-year Treasury to help compensate.
This phenomenon is why that NAR spokesman started saying that the Fed should not drop rates further, (depressing the dollar further and increasing inflation pressures), and why the NAR is now pushing for Congress to do more bailout plans. The NAR can't directly influence the Fed and the Fed can't directly influence the 10-year Treasury note's interest rate.
As for our bankers being a bunch of shysters, yes, most of them are. That is one reason they are coming up with this new plan, (forgot what it is called now, but read it recently from a link either from a Fool article or a CAPS blog), where the bank is going to see how much they can gouge you for on your home mortgage interest rate, (charging you more if they think they can get away with it and you won't compare rates to see that you are getting screwed), instead of your rate just being set by your FICO score, length of doing business with the bank and other quantifiable data. Also, if our banks and brokerages weren't full of shysters, they wouldn't have come up with a lot of these toxic CDO's paper nor would some place like Goldman be shorting the paper that they are recommending their clients buy.
That interest rate is set by the market, and if the market thinks that inflation is coming, they will push up the interest rate on the 10-year Treasury to help compensate.
Exactly! My "non-expert" wife figured that out pretty quickly when I showed her this graph (with a bit of prompting). But then, she is a math teacher, and understands a few things about how numbers work.
If only the average American, or maybe even American legislator, could do basic math, and had the courage to set policy by what it reveals.