Al Grant's Blog

Last week, the Fed stepped in once again to help with the liquidity problems the mortgage market is enduring.  The result of the Fed action was that rates ended about where they began the week, but the path rates took was a volatile one. This week's economic calendar offers little to influence rates until Friday. So will rates continue to be volatile throughout this week?  Read on to find out.

In last week's update, we touched on the Fed's unusual action two weeks ago when they purchased $38 billion of bonds backed by subprime mortgages. Last week, the Fed stepped in again with two more moves designed to help with the liquidity issue the market is facing. First, they cut the Discount Rate a full 50 bps, taking it from 6.25% down to 5.75%. The Discount Rate is the rate at which the Fed lends money directly to commercial banks, credit unions, savings & loans, and to some large mortgage bankers. Remember, this is a different rate than the Fed Funds Rate - which is the rate at which banks lend money to other banks. The Fed Funds Rate is the rate generally discussed in terms of cuts or hikes surrounding normally scheduled Fed meetings. Therefore, the cut last week to the Discount Rate will have no impact on consumer or mortgage rates.  Normally the Discount Rate is above the Fed Funds Rate, which is designed to make borrowing money from the Fed a last resort for lending institutions, since borrowing from other institutions would be cheaper. However, with the current liquidity situation, the Fed's move will help provide lending institutions more liquidity at more desirable rates.

Next, the Fed extended the borrowing period on these funds from overnight to thirty days - this could allow some lenders to use this cheaper money for funding home loans, if they are experiencing a liquidity crunch. It will also allow time for the credit markets overall to calm down and level off.

The timid economic schedule week ahead will offer little to sway rates with the biggest news of the week scheduled for Friday.  The market will likely be reacting to news events during the week, which will likely cause volatility in the market place - Here we go again!

The bottom line: Keep your eye on the market, it is likely to be another volatile week.