The Federal Reserve again reduced interest rates recently, dropping the Federal Funds rate to 2% in an attempt to stimulate a slumping economy that is threatening recession. In what *appears* to be the final in a long string of rate cuts, the Fed hopes to spur economic growth by flushing money into the residential mortgage and commercial lending arenas to spur growth in housing and business in general.

If you’re looking for a mortgage in the current environment, think 30-year fixed rather than an ARM or, if you know you’ll require the loan for a short to intermediate-term, run with a balloon or ARM that reaches (no pun intended) far enough out that you won’t have to refinance, pay the balloon payment or get hit with a vicious reset in 3, 5 or 7 years.

The Federal Open Market Committee (FOMC) has again slashed interest rates, this time .75% in an attempt to restore confidence and, more to the point, assist banks and business as they attempt to recover from a credit crisis. The irony to this point is that mortgage rates and the prime rate have been plummeting along with the fed funds rate cuts, but credit is still a bit hard to come by. With the cut in rates this month, the Fed is indicating to banks that it’s safe to release a bit more money to business and individuals in the form of mortgage and business loans.

What this means for would-be homebuyers is that it is a GREAT time to buy real estate. Despite what the industry analysts are saying, the only real problem in the real estate industry right now is for those who are trying to sell their homes or commercial properties. Even with that, there are still “pockets” around the country where real estate is not in the downward spiral that analysts are noting. In Maryland, for example, where employment figures are good (and will likely remain so due to the world’s largest employer being right down the street in Washington, DC), the housing market has merely experienced a downturn. Doom and gloom, in my opinion, is a bit of an overblown description of what’s going on locally.

If you’re looking to buy a home, however, now is the best time to do so. Interest rates are as low as they were during the hottest real estate market a few years ago and prices have dropped significantly enough to make it a buyer’s market.

It’s been quite some time since I’ve written, and I’ve missed the mark by a few weeks with this latest news, but better late than never, right? The Federal Open Market Committee, aka “The Fed” saw fit to drop the federal funds rate by .5% a few weeks back. Not satisfied that it was enough, however, they turned around and dropped it another .25% the following week.

Other rates are following suit, of course, with the Wall Stree Journal Prime Rate now at 6% as the Fed tries desperately to save the nation from a recession by making money “cheap” for businesses and, to a lesser extent, consumers. The planned tax rebates that will be forthcoming in the next several months are also planned to spur spending by consumers, though many consumer advocates are cautioning that saving or paying down debt may be a better option for the individual, if not for the nation’s economy.

When last I looked, 30-year fixed mortgage rates were floating around 5.5%, with jumbo loans a bit more, as always. While the real estate market isn’t exactly on fire right now, lower mortgage rates should at least lift some of the burden from those attempting to sell a home, as potential buyers will have lower payments than they would have had just one month ago. In Maryland, which has been less severely affected by the real estate “bust” than most other areas, there are signs of recovery in the housing market. While anecdotal, personal experience with Maryland real estate markets indicates that homes are selling just a bit quicker than they were at the end of 2007, perhaps the result of lower rates or a general feeling among potential buyers that the market is at it’s bottom and it’s a good time to “buy low.”

The Federal Reserve has again cut the federal funds rate, this time by .25%, in an attempt to bolster a faltering economy. Though the cut is welcome, it has left both investors and some in the banking industry a bit disappointed. The Dow Jones Industrial Average dropped almost 300 after the announcement, representing a rather odd response to the announcement of lower rates. While the equity markets and interest rates typically have a direct, inverse relationship, the markets appear to have factored in a 1/2-point drop prior to the announcement, and then adjusted from there.

Even with mortgage rates now at a 2-year low (and moving lower, in all liklihood), banks are still hesitant to loan money - what one blogger (hint: me) thinks is merely continued overreaction to poor decisions made by those same bankers during the lending and real estate boom. It seems that banks will never get it quite right - lending too much when they shouldn’t and not enough when they should.

Gregory Miller, Chief Economist at SunTrust banks, notes:

“The Fed is late, and they know it. If they had to do it all over again, I think they would have started dropping rates earlier so it could be done in a more controlled fashion and allowed the market to adjust in a less volatile fashion.”

Thanks for that Greg…if you could venture a quote about banks’ poor lending practices, that’d be swell too. Of course, you can keep on blaming the Fed if you like, but such reliance on (and whining about) the government isn’t very becoming.

According to some mortgage brokers on the hunt for new clients:

We couldn’t have asked for a better Thanksgiving treat than the one we got on Monday: the lowest 30-year fixed-rate in over two years. That’s right. For those of you who have been patiently waiting, here’s your chance to save anywhere from $5,000 to $7,500 or even more on the mortgage financing you’ve been looking for. Do not miss this great opportunity to cash in on the lowest rates since October 2005.

Fannie Mae and Freddie Mac tightened guidelines, announcing new Loan-Level Price Adjustments. In the first quarter of 2008, most borrowers who have good credit, but have FICO scores below 680, will now be forced either to pay more points at closing or incur a higher interest rate.

I was reading a Yahoo! Finance article a few days ago that highlighted some of the ongoing doom and gloom that is currently going on both in the mortgage industry and in the real estate industry. Home sales in September, 2007 dropped 8% nationwide and it seems to be the case that houses are sitting on the markets for very long periods of time. I’ve seen this firsthand, not that I’m currently trying to sell a property, but just in my casual observation of homes that are still for sale that went on the market last Spring. The Yahoo! article points out that in addition to sitting on the market for a long time, median home prices have also fallen 4% in the past year.

Of course, no party would be complete without some bad news in the mortgage arena as well, so here goes:

As if the fundamental sickness in the housing market weren’t enough, a secondary infection has developed. The credit crisis in the mortgage market that erupted in the summer has left huge numbers of potential buyers without any access to mortgages.

The subprime sector has essentially died, with the newly reinvigorated Federal Housing Administration able to replace only a tiny segment of what was once a huge market of home buyers.

The top end of the market was also frozen out, as jumbo loans (those with mortgages above the conforming level of $417,000) became more expensive or completely unavailable.

The question now is when will the real estate and mortgage markets return to some semblance of normalcy? Not the “normal” from the early part of the decade, but a more moderate growth level. Many analysts point out that real estate corrections often take 3-5 years to run their course, so for those hoping for a very quick turnaround, it may not be coming. An ominous note: the article points out that “The market will really begin to recover only after sellers capitulate on prices.” In other words…ouch!

Let the confetti fall and the party begin, right? Wait…not so fast…

2001 saw the Fed Funds rate plummet, with what seemed like a daily cut in the rate until it finally rested at 1.25%, the return on long-term treasuries largely followed suit in a downward motion and low mortgage rates seemed like a godsend for the next 5 years even as the Fed Funds rate again climbed to over 5% by late 2005. Now, the first decrease in the Fed Funds rate seems a little panicked, especially when coupled with a new “stipulation” that allows the most credit-unworthy commercial banks to borrow money not for the “very short term” (typically overnight), but instead for a month or more. In return, the most sketchy banks are putting up their “grade A” loans as collateral, right? Uhh…no, not exactly. In fact, the collateral for these now-longer-term loans is a collection of banks’ WORST loans (i.e. - the riskiest in this instance).

Scary? You bet. The last time the Fed was this directly involved in helping out commercial banks it was to bail out S&L managers who had helped to spur the leveraged buy-out (LBO) era of American greed. Not that there was actually anything wrong with LBOs and junk bonds, mind you - some folks just got a bit more than carried away back in the mid- to late-1980s.

Now, I’m not directly comparing this most recent move by the Fed to the S&L collapse, because the two have little in common aside from the “bailout” nature of the Fed’s actions. This most recent lowering of rates and relaxing of standards might be just want the banking industry needs to get back on its feet. I do, however, wonder what the effect will be for those seeking a mortgage. You see, for this whole smoke and mirrors game to work, investors will have to jump on board, and if I’m investing in mortgage-backed securities (I’m not, at present), I’m wary to the “nth” degree. In short, if you’re looking for some relief in your search for a good mortgage/rate from all this…don’t hold your breath. This latest action isn’t for you…it’s for the investors and the banks.

I was reading a recent article in the Wall Street Journal about credit markets being “too loose” in the recent past and how tight they’ve become in the present. It was interesting to read that the recent credit crunch is the result of events that unfolded as long ago as the 1980s (the dreaded S&L collapse) and continued with the late-1990s reaction to the Asian financial crisis and the more recent (2000 - 2001) tech stock bubble bursting.

When the Fed cut interest rates to the lowest level in a generation to avoid a severe downturn, then-Chairman Alan Greenspan anticipated that making short-term credit so cheap would have unintended consequences. “I don’t know what it is, but we’re doing some damage because this is not the way credit markets should operate,” he and a colleague recall him saying at the time.

This is pretty obvious, really, when we consider that the housing boom was fueled almost entirely by low rates set by the Fed (though in select markets, Baltimore/DC included, massive and sustained job growth also led to supply shortages). Basically, in worrying that the fallout from the severe stock market downturn would adversely affect the economy, rates were lowered to spur growth. It took a while, but ultimately it appears to have worked. Along the way, of course, people bought houses in record numbers, at record prices and with increasingly sophisticated (or complicated) loan instruments. Now that rates are higher and credit is tigher, things are a little ugly.

Robert Eisenbeis, retired research director at the Federal Reserve Bank of Atlanta, says the Fed overreacted to the threat of deflation and kept rates low for too long. As a result, it “overstimulated the housing market, and now we’re dealing with the consequences.”

Fair enough, but the “dismal science” is inexact at best and the only petry dish economists have to work with is the real, live economy that they’re observing.

This isn’t exactly mortgage-related, but it’s in the ballpark, so I didn’t want to miss an opportunity to lambast “Premiere” Martin O’Malley for what amounts to yet another attack on Maryland business. Again I ask, how business “unfriendly” must The People’s Republic of Maryland become before all the businesses simply pick up and leave?

In his latest tax and spend move, O’Malley actually wants to close a loophole that allows LLCs to sell properties without paying the state transfer tax. Nevermind that you won’t get anything in return for those “transfer” (read: standard additional overcharge) tax dollars. What Marty may not realize is that many property owners will hold real estate in LLCs for no other reason than to avoid transfer taxes when they sell (and for liability limitation). OK, so far it sounds like O’Malley might be on to something.

However, the state of Maryland also charges $300 per annum for the luxury of filing a tax return for all Maryland corporations, LLPs and LLCs. So if folks stop buying their real estate in LLCs because one of the primary benefits has been removed, how much revenue with the state lose? Well, at least $300 per year, per aborted LLC, plus the cost of registering the LLC in the first place. Side story, and this is no joke - Maryland charges you to change the address of your company - if you don’t, they’ll send all your important tax bills to the wrong address, no matter how nicely you ask them not to.

Moral to the story? If you’re thinking about doing business in Maryland, and you have a choice to operate elsewhere…choose “elsewhere.” If you’re thinking of moving to Maryland and will start a business, consider someplace else, cause Marty’s on the warpath and no business is safe while this know-nothing lifetime politician tries to butt in where he is least qualified, i.e. - in the world of business.

The news was expected and here are excerpts from the report:

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.