| When
the Fed cut its discount rate by half a point
Friday, Wall Street celebrated. Home buyers and
sellers may have reason to cheer as well.
The
discount rate is the one the Federal Reserve
charges qualified lenders, mainly banks, for
temporary loans. Lowering interest rates
encourages banks to lend more money to mortgage
borrowers.
That
in turn could make it easier for home buyers,
especially those using big-ticket loans called
Jumbos, to get financing.
"It's
a way to unfreeze the market," said Doug
Duncan, chief economist for the Mortgage Bankers
Association (MBA). "Once you get trades
moving, then people start to look around for the
best deals."
"The
move could ease the squeeze for some banks and
lending institutions," said Ken Goldstein, an
economist with business management researcher the
Conference Board. "The practical impact is
that you're telling everyone that the lender of
last resource is still in business."
"People
are borrowing from the discount window in pretty
big chunks right now," said Dean Baker,
director of the Center for Economic and Policy
Research. Still, he believes, the impact on
mortgage borrowers will be minimal.
"Subprime,
Alt-As and jumbos will still be under
pressure," said Baker, "because you
still need someone to hold them."
For
Duncan , however, the move could add some grease to the
market wheels. "The critical issue was
getting the jumbo piece moving. Once that moves,
then getting Alt-As moving and then even subprimes"
are next.
According
to David Wyss, chief economist for Standard and
Poor's, the biggest obstacle to lenders, is that
they have been unable to obtain short-term
financing to enable them to keep issuing loans. The Fed's latest move means they can.
"It
provides emergency liquidity for securities backed
up in the financial markets because people are
afraid to buy them," said Wyss. "It
announces that the discount window is open for
business and that means there will be mortgages
available."
Even
more significant, according to Wyss, is that the
Fed extended the length of the loan to 30 days,
giving lenders a larger window they can use to
place loans with other investors.
"The
Fed is saying any liquidity you need for these
funds, come to us - we'll give them to you."
For
Joe Mason, an economist and professor of finance
at Drexel, the 30-day window is not long enough.
"[Lenders]
are going to have to roll that over in 30 days,
max," he said. "The problems will take a
lot more than 30 days to work out."
Mason
also cited Bagehot's rule, a basic banking
principle which he explained as the need to
distinguish between illiquid and insolvent
organizations. "You want to lend to illiquid
but not insolvent institutions," he said.
Lending to insolvent institutions just enables
them to dig themselves an even deeper hole.
To
him, that's what seems to be happening.
Newsletter article courtesy of
CNNMoney
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