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How will the $1.15 trillion being pumped into the economy by the fed effect long-term mortgage rates?
The 30 year fixed mortgage fell to 4.75%.
Will the lower mortgage rate stablize the housing market?
Will construction/manufacturing gain higher production levels are order increase?
Will the lower mortgage rate stablize the housing market?
Will construction/manufacturing gain higher production levels are order increase?
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The anticipation is that this purchase will drive down interest rates. Most mortgage interest rates are tied to the rate of a treasury bill, so with this purchase reducing the rate of t-bills, mortgage interest rates nationwide are supposed to drop.
A reduction in mortgage interest rates will have a number of effects. It will make it easier for people to purchase a house, and it will make it easier for people to stay in the homes they currently have. One of the biggest economic problems recently was the people who had "teaser" interest rates that were artificially low for 2-3 years and which have now reset to much higher rates, leading to foreclosures all across the country. If we can reduce our foreclosures, we can start coming out of our economic situation that we find ourselves in right now.
A reduction in mortgage interest rates will have a number of effects. It will make it easier for people to purchase a house, and it will make it easier for people to stay in the homes they currently have. One of the biggest economic problems recently was the people who had "teaser" interest rates that were artificially low for 2-3 years and which have now reset to much higher rates, leading to foreclosures all across the country. If we can reduce our foreclosures, we can start coming out of our economic situation that we find ourselves in right now.
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The fed is betting that it can stablize the housing market by diluting the money supply.
It can do all those things, but only if banks decide to release their death-grip on their funds available for lending. Now that the Dow is going back up or at least not having such bungee-style drops, they may finally relax it. The Dow is hovering at around being down about 4 points as I write.
When theres expansionary monetary policy the reason is to lower the cost of borrowing. The problem is that lowering the cost of borrowing does not make people afford their loans. Expansionary monetary policy is linked to lower interest rates.
I think what the Fed is going for is facilitating borrowing for businesses, hoping that the added liquidity will trickle down and stabilize the markets.
The whole point of expansionary monetary policy is to increase liquidity and I think that it can work. It's already working as stocks are increasing in value.
The question is whether banks will respond and actually lend! And it seems like they might as fixed rate mortgage rates are at a record low.
I think what the Fed is going for is facilitating borrowing for businesses, hoping that the added liquidity will trickle down and stabilize the markets.
The whole point of expansionary monetary policy is to increase liquidity and I think that it can work. It's already working as stocks are increasing in value.
The question is whether banks will respond and actually lend! And it seems like they might as fixed rate mortgage rates are at a record low.
source(s):
What I recall from Econ 101
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE52I4FR20090319
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4casqSvuecw&re...
http://en.wikipedia.org/wiki/Monetary_policy#Interest_rates
What I recall from Econ 101
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE52I4FR20090319
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4casqSvuecw&re...
http://en.wikipedia.org/wiki/Monetary_policy#Interest_rates
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2. A collateralized debt obligation (CDO) is a redistribution of credit risk. The CDO is a portfolio of securities in the form of bonds with different ratings according to how safe they are. Bond safety is determined by risk against default. The safety of the bond is called a tranche. The CDO Tranches are then sold too Tranche A to pension funds, Tranche B to mutual funds, and Tranche C to hedge funds. The CDO portfolio, payouts a specific yield amount each year, in interest payments. If the securities that comprise the CDO have zero, the CDO value is 100 percent and nothing happens. If a percentage of the CDO default then there will be less income and a reduce yield payout. What happens when a CDO experience yield shortage?
3. Deutsche bank created offshore companies known as collateralized debt obligations (CDO). The offshore companies holding CDOs is called static residential CDO.
4. In 2005, AIG acquires mortgage risks held by START, earning $10 million for every $1 billion insured (CDS). An unlimited number of CDS can be written on a debt obligation (CDO). The bank transfer its insurance risk too AIG. In essence, AIG was betting the housing market would remain stable and CDOs would not default.
5. When AIG credit rating was cut then AIG paid out $800 million too START.
6. Money is moving from AIG too START, too Deutche bank, and too the Hedge funds (CDS payouts).
7. AIG runs out of money and the government provides $170 billion in bailout funds and owns over 80 percent of AIG.