So why aren’t interest rates falling for my home loan in Santa Cruz?

Lending and related topics

Federal Reserve Bank Chairman Ben Bernanke may be trying to lead the banks in the right direction, because he can't push them. The Feds policy have made seven rate cuts since September, cutting 3 percentage points off banks borrowing costs,and the effort has failed to spur a recovery thus far. The average rate for a 30-year fixed mortgage has only dropped half a percentage point during that period. The banks are pocketing the money to make up for their past bad decisions, is my opinion on why they have not dropped for consumers.

The last time……

The average U.S. 30-year fixed-rate mortgage rate dropped to 5.93 percent at the end of 2002. The Fed had just cut another half a percentage point off its benchmark rate in the prior month. This brought the banks to reduce their rates to consumers, creating the rates in almost four decades. Banks can charge whatever rate they feel comfortable charging.

As the Feds had worked to stimulate the economy, which was coming out of a tech stock crash, the Fed rate cuts helped. Stimulated by the lower costs, which the banks passed on to consumers, keeping their normal margins, home sales jumped 5.5 percent in 2002 to a 5.63 million units.

In June 2003 the lowest 30-year fixed rate ever recorded was 5.21 percent and the refinance and housing boom was on. Currently the 30-year fixed rate is 5.85 percent for conforming loans of $417,500, according to Freddie Mac. Because Santa Cruz real estate prices are so high, they are in the new “raised high cost conforming limits” of $729,500. These new rates will not be as low as the lower conforming rates, but they will probably be about .25% higher. Long term mortgage rates fluctuate daily based upon bonds because long-term rates are driven by bond markets, which reflect investors' expectation of future inflation and current worry. Now we have the poor credit markets and falling dollar and housing prices which have melted away equity, weighing on consumer minds.

Lenders are now the problem again, in my opinion, and they aren’t helping by holding on to the discounted funds the central bank is giving them. Even after they've been given seven interest rate cuts, and a new program designed to jumpstart borrowing, there is still fear in the markets. Lending guidelines are some of the toughest in 20 years with it common now to have 10% minimum down payments. When I started 20 years ago in real estate, it was common to have 20% down payments. Back then I recall buyers paying 16-18% in 1982, so the 6% -7% or so rates are still very cheap home financing. There was much creative lending then to provide reasonable liquidity so a seller could sell and buy another home, and it was usually done between buyer and seller, not the banks.

The difference between the 10-year government bond yield and the average U.S. fixed mortgage rate was 2.7 percentage points last month. This is the widest spread since 1986, according to data compiled by Bloomberg. Banks are thwarting the planned stimulation Fed Chairman Bernanke was hoping for, and hoarding cash after writing down the value of more than $200 billion of mortgage-related securities since July. The financial sector has been battered, with industry's earnings falling to a 16-year low of $5.8 billion in the fourth quarter of 2007, ending six years of record profits, according to the Federal Deposit Insurance Corp. in Washington.

With the fall of many banks, including the once all powerful Bear Stearns, many banks are still nervous. Banks are holding on to their increased margins and rebuilding their bottom line and remain reluctant to pass on their higher margins they are getting due to the fed action. Fixed mortgage rates seem to have disconnected from the 10-year Treasury bond,'' with rates in the 3.6% range

In Santa Cruz, Woodward-O’Connor Mortgage, rates this April 4, 2008 for a 30 year conforming loan are 5.625%. The “jumbo conforming” are almost a full point higher at 6.5% and the “jumbo above conforming” at 7.5%. All loans are based on a 1 point cost plus other title and escrow and associated fees. Having been doing loans for 25+ years, call Stephanie at 831-479-3303.

So in the Santa Cruz real estate market, the values have fallen, and I suspect most of the problems are recognized. They buyers will have to take that leap of faith that the government is taking corrective actions and things will improve. The problem with waiting for the bottom is: you don't know you're there until it's gone past, and prices and rates start to rise.Don't be late, in 5 years you will look back wistfully, I suspect.

Now is the time to act with good values and supply. In Santa Cruz there is limited supply capability, which will always constrain a drastic downward slide that is evidenced in areas where it is easy to bulldoze down more fields or desert and build another subdivision.

See what the Federal Reserve Board has done in the past with their reductions.

Intended federal funds rate
Change and level, 1990 to present

Change (basis points)
Date	Increase	Decrease	Level (percent)
2008
March 18	...	75	2.25
January 30	...	50	3.00
January 22	...	75	3.50
2007
December 11	...	25	4.25
October 31	...	25	4.50
September 18	...	50	4.75
2006
June 29	25	...	5.25
May 10	25	...	5.00
March 28	25	...	4.75
January 31	25	...	4.50
2005
December 13	25	...	4.25
November 1	25	...	4.00
September 20	25	...	3.75
August 9	25	...	3.50
June 30	25	...	3.25
May 3	25	...	3.00
March 22	25	...	2.75
February 2	25	...	2.50
2004
December 14	25	...	2.25
November 10	25	...	2.00
September 21	25	...	1.75
August 10	25	...	1.50
June 30	25	...	1.25
2003
June 25	...	25	1.00
2002
November 6	...	50	1.25
2001
December 11	...	25	1.75
November 6	...	50	2.00
October 2	...	50	2.50
September 17	...	50	3.00
August 21	...	25	3.50
June 27	...	25	3.75
May 15	...	50	4.00
April 18	...	50	4.50
March 20	...	50	5.00
January 31	...	50	5.50
January 3	...	50	6.00
2000
May 16	50	...	6.50
March 21	25	...	6.00
February 2	25	...	5.75
1999
November 16	25	...	5.50
August 24	25	...	5.25
June 30	25	...	5.00
1998
November 17	...	25	4.75
October 15	...	25	5.00
September 29	...	25	5.25
1997
March 25	25	...	5.50
1996
January 31	...	25	5.25
1995
December 19	...	25	5.50
July 6	...	25	Date: 2008-04-04 13:40:02 Views: 140