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.

Tags: commercial banks, fed funds rate, LBOs, mortgage rates, savings and loans, treasury securities

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