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Money for Breakfast Fox Business NetworkDecember 11, 2007 8:00 AM - 9:00 AM PETER BARNES, co-anchor: The Fed is expected to cut rates in just a few hours from now, but will it help our foundering mortgage market? Joining us now to break everything down is Bob Moulton, he is the president of Americana Mortgage Group, and Dr. Danielle Babb, real estate analyst at drdaniellebabb.com. Welcome to both of you, Dani and Bob. Mr. BOB MOULTON (Americana Mortgage Group, President): Good morning, Peter. BARNES: Let's clarify one thing; will a cut in the Fed's fund rate today cut mortgage rates? Dani? Dr. DANIELLE BABB (Real Estate Analyst): Yes, it will, but it's going to take some time. If we have a half point cut today it's not going to drop a half-a-point today. Also, we have to remember that a lot of these industrial rates are actually tied to the LIBOR price and not to-- BARNES: Yeah, all right. Dr. BABB: Yeah. BARNES: Jargon. LIBOR is the bank lending rate in London. Dr. BABB: Right. BARNES: Right. Go ahead. Continue. Dr. BABB: Yeah, so I think we will see some rates cut, we will see some mortgages, particularly HELOCs drop--home equity lines of credit. But I don't think we're going to see an initial cut today that's going to make a huge impact. BARNES: Yeah, and Bob, expand on that, a home equity line of credit, adjustable rate mortgages, and fixed rate mortgages, be very specific, if the Fed cuts the Fed funds rate, what's going to happen in each of those three? Mr. BOB MOULTON (Americana Mortgage Group, President): Well if the Fed cuts the Fed funds rates today what will immediately happen is the prime rate will come down. So the prime rate is at 7 1/2 percent, so if they cut 50 basis points and 25 basis points, the prime rate will drop to 7.25 or 7 and immediately anyone who has a home equity line of credit will see their payment come down in the following month. Mortgages, first mortgages, I think, may have anticipated the Fed funds cut already, because we saw a nice rally in a 10-year treasury over the last couple of weeks and we saw the 10-year treasury under 4 percent, and there's usually a risk based premium above the 10-year treasury to first mortgages. And for the first time in two years, we saw 30-year fixed rates under 6 percent. So those are sort of anticipated. Regarding adjustable rates, I think that will factor in over time and not have the appreciation that you have with the home equity lines of credit. BARNES: Yeah, and let's be absolutely clear, the Fed funds is a short-term interest rate. Mortgage rates tend to be long-term interest rates; long-term interest rates tend to be set by the markets. Mr. MOULTON: Correct. BARNES: By the rates on the 10-year--they're pegged to things like the 10-year treasury interest rate and the London inter bank borrowing rate. So, I want to make sure we're clear on all of that. So, if--I mean the first people that will benefit from this will be people who have home equity line of credit and then possibly people who want to have an adjustable rate mortgage or want to get an adjustable rate mortgage? Mr. MOULTON: Well, we saw the five year arm up to a million dollars drop to 5.625 last week. So people that are looking at taking out a mortgage for a large amount of money are more inclined to take a five year arm, which is benefiting from the anticipation of the Fed fund's cut, because the 30-year jumbo mortgages are about 100 basis points higher. BARNES: One percent-- Mr. MOULTON: One percent-- BARNES: One percentage point higher. Mr. MOULTON: One percent, so from 5 and 5/8ths to 6 and 5/8ths. When you translate that to a monthly payment that could make significant dollars and cents for homebuyers. BARNES: So Dani, one way or another we are seeing lower interest rates either with the home equity lines or the adjustables, and the markets are helping to bring down the 30-year fixed rate mortgage. So... Dr. BABB: Right. BARNES: ...is it a good time to possibly buy a house, given the weakness in the housing market and so many homes for sale? Dr. BABB: Yeah, I've been saying it's a good time to buy for months, because just like in the stock market we want to buy low and sell high. And anytime--if you're going to hold your home for the next few years, you're not really going to care about a $5,000 drop in price between now and maybe next spring, for example. I think now is a great time to buy a home and I'm actively pursuing purchases across the country. BARNES: All right. And Bob, real quick, what kind of activity are you seeing people, kind of, waiting and holding back or are there a lot of applications at your shop right now? Mr. MOULTON: We had a great November. We were slow, you know, July through October; there was a lot of, you know, concern with the markets. But there's a lot of pent-up demand there. People are taking a look at, you know, where rates are, rates are close to a 40-year low; if you have prices that are softening up 5 percent this year, maybe 5 percent maybe next year. So we are seeing a great November and good December and hopefully next year. BARNES: Yeah, but you--and you're mainly in jumbos, we just want larger mortgages rather than smaller. Dani, Bob, thank you so much for your insights this morning. Dr. BABB: Thank you.
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