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Federal Reserve keeps rates near zero
 

3-19-09 The Fed kept its federal funds rate unchanged at a range of zero% to 0.25%. As a result, the prime rate remains unchanged at 3.25%. That also means interest rates will stay unchanged for consumer debt that is tied to the prime rate, this includes home equity lines of credit.

Although additional rate cuts are not possible, there are other ways to stimulate borrowing. One way is for the Fed to buy long-term Treasury securities. The Fed will buy up to $300 billion in long term Treasuries over the next few months. They believe this will decrease interest rates on loans to consumers and businesses.

In addition, the Fed will increase its purchases of mortgage backed securities. That should put a ceiling on the 30 year fixed mortgage rate and could possibly keep the rate below 5.5& for months.

Last year when the Fed announced that it would buy up to $500 billion in mortgage backed securites the mortgage rates dropped a full percentage point in six weeks. The Fed just committed to another $750 billion to buy securities and has pledged to buy up to $1.25 trillion in mortgage backed securities this year.

There is more..... The Fed increased its commitment to buy debt from Fannie and Freddie up to $200 billion. This will potentially lower rates as well.

Many mortgage professionals worry that potential borrowers will watch rates fall and then continue to wait for rates to fall to the much anticipated (and potentially unrealistic ) 4.5% range. It is highly unlikely that rates will fall that low and potential borrowers will get burned by waiting for rates to fall to that level.

Even if rates DID drop significantly, a wave of mortgage applications could swamp the system just as it did in January. Lenders will simply repeat what they did back then which was raise rates to discourage applications so staff can process the applications they already had. Keep in mind that most banks are looking at a minimum of three weeks to simply review the files RIGHT NOW. Typical refinance closings are taking up to 45-60 days.

The Federal Reserve System

 

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