While the Fed Funds Rate reduction does not directly affect mortgage rates it does have an impact on the interest rates investors utilize. When we read in the paper about how the Fed has slashed interest rates, the rate that has been cut is the lending rate between banks and other depository institutions. As the interest rate decreases for banks to borrow money, the bank in turn passes this reduction to the general public. Mortgage Backed Securities dictates conventional interest rates; it is the demand of the market that causes rate increases and decreases. However, rates tend to pattern the Fed, but they are not set by the Fed. The interest rate that real estate investors should be paying attention to and that can be directly correlated to the Federal Reserve, is the Prime Rate. The Prime Rate was at 8.25% in September 2007 and now it is at 6.00%. That 2.25% means substantial savings for all investors that utilize lending tied to prime.

Investor Rehab

There are several ways to finance your rehab project: hard/private money, cash, credit cards, or home equity lines of credit (HELOC). A number of investors utilized lines of credit on their primary home or existing investment properties to rehab their projects. This is becoming even more favorable because all HELOC’s are tied to prime. If you had your HELOC prior to September 2007 you have seen a 2.25% rate reduction. On a $50,000 HELOC the rate reduction saves you $93.75 a month.

Spec Building

Prime Rate has a similar affect on financing of spec homes or construction loans. Most spec and investment properties are financed with interim construction loans. These loans are based on a margin -/+ Prime Rate. Once again, since September there has been a 2.25% rate reduction. On a $417,000 loan amount this equates to a $781.88 monthly savings on the debt service.

Cash Flow

While the Prime Rate is seldom used to secure an investment property long term, it is worth mentioning how the Fed Funds Rate can help the average investor cash flow. Historically conventional interest rates have followed the direction of the Fed; this has caused the interest rate to decrease significantly since September. There are a number of variables on investment properties, but if an investor can qualify by having great credit, documented income, assets and have 30% equity into their property, rates have been as low as 5.5% on a 30 year fixed over the last month. This is only an illustration. Please contact your trusted mortgage advisor to check your specific scenario.

With more potential rate cuts in the near future 2008 is a very good time to be in the real estate investment arena.

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Tags: cashflow, Feds rate cut, mortgage for investors, rehab, spec construction

In a recent post on our forums, one of our members noted that she was hoping for a major drop in interest rates from the Federal Reserve. Richard Warren, one of our resident bloggers and real estate geniuses had a great bit of insight on the situation that I thought merited sharing:

Don’t be so quick to hope for lower rates. A simple law of physics states: Every action has an equal and opposite reaction. Lower interest rates from the Fed will lead to lower rates on investor savings. It will also cause an already weakened dollar to fall even further. This, in turn, will cause the cost of imported goods to rise. The major import is oil. After the last rate cut the price of oil hit the $100/ barrel mark. How much do you want to pay for gas? Lower short-term rates will lead to higher inflation. This will cause long-term interest rates to rise taking mortgage rates with it.

The Fed has to play a very dangerous game with interest rates. It is a balancing act. The primary purpose of the Federal Reserve is to provide liquidity to the markets, everything else is secondary to that. If they stray too far from that purpose very bad things can occur.

Any thoughts on this one?

interest rates, Federal Reserve, the Fed, savings, short-term rates

The Fed Moved! Freaking amazing when you think about it. The first few words to appear in the first paragraph of an updated New York Times posting are :” The Federal Reserve moved…”

Now this may seem like a fairly benign statement until you consider this: Had the Federal Reserve moved say, six or seven years ago, we might not be in this mortgage/housing/credit/banking crisis that we find ourselves in, along with much of the rest of the developed world.

How do we know this?

According to a Times article from Washington, some seven years ago, Edward Gramlich, then a Federal Reserve governor, warned that “a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.”

Sound familiar? It should. It’s the root cause of the chaotic financial mess that has engulfed us like a mountain lion chomping down on a parakeet. (And no, I don’t know if mountain lions even like parakeets or even know, for that matter, what a parakeet looks like.)

BUT…reportedly, when Gramlich tried to nudge the Fed to move and take a closer look at the developing mortgage lenders/national banks connection, then Fed chairman Alan Greenspan told him to f— off! Okay, maybe Greenspan didn’t actually tell Gramlich to f–off; but, he clearly wanted to because Greenspan sat on his butt and did, hold on to your seats, nothing.

In fairness, which I am not inclined to be, mind you, Greenspan told the august Times that the reason he sat on his butt was because the Fed was “poorly equipped to investigate deceptive lending” and, is “not to blame for the housing bubble and bust.” Poorly equipped? The U.S. government? I mean, could the Fed have at least rounded up a few of those college intern-types to do the heavy lifting and help with the much needed investigations?

The reason, other than spite, for bringing up the non-movement of the Fed seven years ago, is to contrast it with what has apparently just happened as I sat down to write this post. What has happened now is…….The Federal Reserve moved! It came up with some new restrictions to curb unfair and deceptive home-lending practices, reports the Times.

Voting 5-0, the Fed opted to “tighten provisions meant to protect borrowers and apply them to a far larger share of home loans.”

After a period to permit public commenting, the proposed new rules could go into effect next year.

Now then, the Fed is doing all this using its power under the Truth in Lending Act as well as the Home Ownership Equity Protection Act. And, you know when that act went on the books?

All the way back in 1994. Which brings us back to the now very dead Edward Gramlich who wanted his own agency to do something seven years ago when Greenspan now says the Fed lacked the equipment to move. Nonsense. It had all that was needed in 1994.

Gramlich must be turning in his grave, his corpse practically shouting out to Greenspan : “I told you so, you shmuck!” or words to that effect.

But, in the meantime, let us all take solace in the fact that The Fed Has Moved!

Tags: Alan Greenspan, federal reserve, mortage crisis, The Fed

The Fed just announced that it would be cutting the federal funds rate by 1/2 point to 4.75 percent. This is the first reduction in four years and will affect everything from credit cards to adjustable rate mortgages.

Clearly this major cut is indicative of how bad the Fed thinks the economy is. It will certainly provide temporary help for many people, but I’m wondering if it is too little too late . . .

Tags: bernanke, Economy, fed, fed chairman, fed cut, federal reserve, prime rate

The nation’s largest lender, Countrywide, tonight announced that in an effort to cut costs and essentially save the company, it would be cutting 12,000 jobs.

The cuts, amounting to as much as 20 percent of its work force, are needed because the company expects new mortgages to fall about 25 percent in 2008 from this year’s levels, Countrywide said.

“During the past two years the growth in home price appreciation has stopped dead in its tracks and in many areas of the country it has turned in the wrong direction,” Mozilo said in the letter. In recent weeks, Countrywide borrowed $11.5 billion and sold a $2 billion stake to Bank of America so it could keep operating its retail banking and mortgage lending businesses.

What say you now folks?

The R Word

Are we not in for some scary times to come?

I think this is going to lead us in one direction — R E C E S S I O N

That’s right . . . given everything going on with the business and economy, it looks RECESSION is coming soon to a country near you!

Never fear, though! If you can remain smart about how you invest (both in real estate and in equities), how you save, and mostly, how you spend, you can ride it out. Some of the best opportunities can be found in tough times, which means it’s time to start looking!

Tags: countrywide, Economy, Interest Rates, lender, loan, mortgage-lender, recession

The President and others in office continue to tell us how well our economy is doing. Lets take a look at some of the latest news to see how things are really doing . . .

Today, according to Breitbart.com, the Federal Reserve added 31.25 billion dollars in temporary reserves to the US money markets Thursday in three different operations, the latest move to keep credit markets from drying up.

The New York Fed added 7.0 billion dollars in 14-day repurchase agreements, 16 billion in seven-day repurchase agreements and 8.25 billion in one-day repos. The Fed has injected some 200 billion dollars into the financial system since August 9 in a bid to boost credit flows which have seized up due to problems linked to the distressed US mortgage market.

Does it sound like things here in the states are healthy??

I look at phrases like “credit flows which have seized up due to problems linked to the distressed US mortgage market” and “the latest move to keep credit markets from drying up” as bad signs, don’t you?

So, thanks to the Mortgage Disaster, the fed has now pumped $200 BILLION dollars into the economy to keep it afloat . . . I’m not quite convinced by the argument that we’re in for a smooth sailing economy.

To further my sinking feeling about things, the Mortgage Bankers Association released a report today, stating that mortgage-holders starting the foreclosure process in the April-June quarter reached 0.65 percent, marking the third consecutive quarter that this figure has set an all-time high. Further, with home sales falling, the inventory of unsold homes rising and prices stagnant, some speculators are choosing to default on their mortgages.

DAMN SPECULATORS!!!

As I’ve said in the past, while the economy is certainly weak, and the housing market continues to look bad, despite what the NAR and the Government say, this is the perfect time to learn about investing. There are opportunities presenting themselves everywhere in the country, and if you can learn how to capitalize on the foreclosure market, you can do quite well, even in this crazed economy and market.

Fed Chairman Ben Bernanke Announces Plan to Abandon Lenders and Investors

With that in mind, I thought it would be important to mention the words of Fed Chairman Ben Bernanke, who commented in a speech last Friday, the central bank is ready to cut rates if turmoil in financial markets starts spilling over to the general economy. But, Bernanke added, “it is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.“

Interesting . . .
So the chairman doesn’t think the Fed should protect lenders or investors, even though the Government did nothing but encourage all of the activity that led to the current Housing-Mortgage-SubPrime-Economic Crisis.

Looks like we’re on our own folks . . .

Tags: Ben-Bernanke, bernanke, Bush, credit-flows, fed, federal reserve, foreclosure, Housing Bubble, Mortgage-Bankers-Association

A Revealing Look at our “Booming Economy”

So our economy is booming, Mr. Bush? I’m not sure what picture you’re looking at, but things are starting to look pretty bleak from where I’m sitting. The Sub-Prime Mortgage Mess has led to the Housing Bubble & Burst, which has led to the Credit Crunch, which looks to potentially lead to either a US recessions or possibly a global one. Both US and Global markets have been in a downward spiral of late. The S&P 500 is now in the red for the year, while the Dow is now down for the 5th day in a row, 8% off its all-time high set only last month (Note: a stock market “correction” is defined as a 10% drop from the market’s high). Global markets were down overnight on fears from the continuing US credit crunch, and both European and Asian Central Banks have been infusing cash into their banking systems in an attempt to assuage their local markets.³

For example, “the Bank of Japan announced Thursday (Today) an injection of 400 billion yen (3.4 billion dollars) into the banking system amid renewed turmoil in global financial markets. It was the first time in three days that the BoJ had pumped emergency funds into the financial system as part of a concerted action by global central banks to try to avert a credit squeeze caused by problems in US mortgages.”⁴

On top of it all, national foreclosure rates are up, with “the total number of properties either entering or moving through some stage of the foreclosure process was 131,574 or one foreclosure for every 879 households in the U.S.”¹ The Nation’s largest mortgage lender, Countrywide, today “borrowed $11.5 billion from a group of 40 banks to fund loans, in a move that shows just how deep the lending crisis has become.”² The stock is now down 15% year to date and Moody’s Investors Service “downgraded Countrywide’s senior debt rating to “Baa3″ from “A3,” citing Countrywide’s funding problems.”²

Doubters may say that we’re close to full employment, interest rates are low, and everything else is rosey, but they are ignoring the mass of debt we’ve had to incur to “keep the economy rolling.” In addition, the true cost of almost all goods has risen dramatically, including gasoline, food, and other staples. The economy has been great for the rich, but the middle class and nation’s poor have continued to struggle.

Have you wondered why there is so much talk about China on the news lately? It is likely because they own us. Really! China owns so much US debt that we have lost most of our negotiating leverage with them. On top of all of that, they now manufacture 75% of our toys, and much of everything else we buy. The trade imbalance between our countries is astounding, as we import most of our goods from them and they don’t really need what we’ve got to sell, which these days isn’t very much other than weapons and military goods.

What Does All This Mean To You?

For starters, borrowing has become much harder - not only for individuals, but also for corporations. If you’ve got bad credit or nothing to put down on a property, you’re going to have a difficult time finding someone to lend to you. Sellers must be realistic about their pricing strategies, or they may be stuck losing out. If you’re looking to sell, be aggressive with your pricing. It is a buyer’s market, so the buyer is going to be at an advantage in most negotiations.

Tip: In a shaky market, invest in cash-flow positive properties and forget about appreciation!

Keep in mind that regardless of the economy, investing in real estate is always a smart move. The key is in buying a property that cash-flows. I’d avoid at all costs an investment property that “promises to appreciate”. Especially in this market, you’re just asking for trouble. You want to buy properties at a discount that have enough cash flow to bring in a profit. It is extremely important that you understand the basic tenets of cash flow investing, as most real estate agents and the average investor simply does not. We’ll certainly cover this topic in the future, but if you’re looking for a great book that takes a no-nonsense look at cash flow investing, I recommend Mike Wood’s (he’s one of our favorite forum contributors here on BiggerPockets) book, 1 Minute to Rental Property Riches.

What do you think of the current state of the US economy?

Sources Cited:
¹ Building Online - One New Foreclosure Filing for Every 879 U.S. Households
² Houston Chronicle - Countrywide borrows $11.5B from 40 banks
³ Orange County Register - Today’s editorial: No government cure for housing pain
⁴ The Raw Story - BoJ to inject 400 billion yen into banking system