Fed interest rate cut

Strong Bad

I see the feds cut a key interest rate by 3/4%.

I'm not a finance whiz, so my question is...

How does this rate cut factor into new car loans? Will it affect them? If so, how long till this cut trickles down to lenders?

Yeah, new car purchase soon.


John

Kex

It should certainly help you get a better rate in theory, depending on your credit rating of course.

strider

You're one step ahead of me, John.

I'm curious as to how this will affect the mortgage rates. We're locked into a rate 'til 2/20 for refinancing our house, just wondering if we'll be looking at a lower rate or not.

Ben

PhantomOG

Supposedly they hinted at further rate cuts so hopefully mortgages rates will continue to go down. I hope I have enough equity in my house to put my 80/20 into a single 80 with rates lower.

polktiger

It will not hurt car loans or mortgage rates as there pressure will certainly be downward not up. Mortgages frequently use the LIBOR rate as opposed to the Fed Funds rate as a basis. Don't expect a huge drop maybe an 1/8 or 1/4 at best.

strider

PhantomOG wrote: »

I hope I have enough equity in my house to put my 80/20 into a single 80 with rates lower.

That's exactly what we're in the process of doing. We did a 80/10 with 10% down in August of '06. We have enough equity (barely) to roll it all into one loan. Going from one at 6.75% (80) and one at 9.0%(10) to one loan at 5.75%, or lower if we're lucky.

Strong Bad

My credit union is around the 5.75% - 6% mark with new car loans. You get the best rate with auto withdrawal payments.

It's no wonder the mortgage industry is in such utter chaos right now. They make you finance anything above 80% of the loan at a much higher rate. What a F***ing scam!!! Then you get boned in the arse with closing costs.

The mortgage industry needs some SERIOUS overhauling and not just the subprime lending area! They know how to turn the american dream into a nightmare!

Kex

Strong Bad wrote: »

My credit union is around the 5.75% - 6% mark with new car loans. You get the best rate with auto withdrawal payments.
...

I don't know if you'll be able to get better than that. That rate already seems pretty low to me, and even a 0.25% decrease from there will only make a small difference in your monthly payment. If you can already get that rate, I don't think you have anything to worry about (other than pushy salesmen, but there are ways and means to control those guys too).

PhantomOG

Penfed has new auto loans at 4.99%

join NMFA for $20 if you are not military or related to military.

I haven't dealt with them directly but they are supposedly good. My brother has an auto loan with them, he was happy.

Kex

The duration and type of the loan also typically affect the rate. Thirty-six month loans benefit from a lower rate than a sixty month loan. New car loans are always cheaper than used vehicle loans ... etc. etc.

kn505

For mortgage fixed rate loan, if you can lower the interest rate by 0.25% and avoid a large closing cost, you can save a few thousand dollars. I created an Exel file to calculate the savings, but can't attach it here. If you want the file, email me at kn505@yahoo.com.

shack

What the fed is doing may have no immediate effect on mortgage rates. Two different animals. Overnight short term vs long term. What the fed has lowered is the rate banks can borrow from them for overnight short term needs. It immediately affects the "prime" (variable) rate. Long term rates are more affected by the bond market. Remember also that banks set term rates based on what their money costs them...very little of which comes from the federal reserve. Some of the funds the banks lend will reprice immediately (savings, MM, etc.) but CDs will reprice slower. Also many rates are where they are in anticipation of the feds action today. If the decrease is more than they anticipated then we may see some lowering of term rates and certainly the next "emergency" cut will have some addional effect. Loans tied to the prime rate will come down immediately...but term rates (autos, home loans) may be slower to come down. Another thing is banks have been hammered with mortgage and CC defaults. They may take their time lowering rates to recover some of their losses. They will still be VERY selective in who they are lending to as the Govt. regulators of banks are really playing hardball with loan quality there will be no "subprime" situation any time soon.

Long story made short. Car loans and home loans may come down over the next few months...but don't expect them to be 3/4% lower immediately ( or whatever next rate drop is). It will take some time.

shack

Strong Bad wrote:

It's no wonder the mortgage industry is in such utter chaos right now. They make you finance anything above 80% of the loan at a much higher rate. What a F***ing scam!!! Then you get boned in the arse with closing costs.

The mortgage industry needs some SERIOUS overhauling and not just the subprime lending area! They know how to turn the american dream into a nightmare!

John, you don't have a clue. There is a reason for the 80%. Anything above that amount carries a big..no make that HUGE..risk and accordingly deserves a higher rate. The mortgage market doesn't need an overhaul...It needs to go back to making sure when someone buys a home, they can afford it, both in terms of making a down payment and making the monthly payment. The problems we are seeing today are due to lending 100% of purchase price, not having to prove income (stated income) and assets, unscurpulous mortgage brokers (and bankers), bad R/E agents and quite frankily people buying a home that have no business buying a home.

In the past we have been treating the "American Dream of owning a home" as a God given right and not a priviledge earned...therein lies the problem.

I agree paying "points" is bad...but making sure there is good title, making sure of what the home is worth, making sure there are no legal issues, making sure the transaction is handled correctly, etc...are valid costs which should be born by the parties involved. NOT a scam.

Face

So how much longer till I can refinance my house in the 4.X range?

Strong Bad

You call it "going back to...." and I call it "overhaul." Whatever you choose to call it, it needs to be changed to fix all the problems that have come about and that have existed for quite a while.

Lets go for this scenario and feel free to debate it. I ask replies to be civilized and to educate us who may not be seeing the whole picture. I see these things day in and day out and seriously have to question why it is the way it is. It's our right to question these things.

Here goes...

I decide to buy a $200k home and have $40k sitting in a bank account. The lender runs through everything and determines i have excellant credit, solid income and can well afford this home. No issues at all. I say however, ya know what, i don't like the idea of wiping out my savings just to satisfy the lender in putting down 20%. I like having that cushion of very liquid cash on hand for who knows what emergency may arrise. I could get in an accident tomorrow and need that liquid cash to keep things above water for a little while.

The lender has determined me to be a solid borrower in their eyes, so why is it the borrower gets nailed for a higher rate on anything above 80%? Who determined the 80% mark?

I do agree that things must be tightened up bigtime. These interest only loans are a damn joke! They made it WAY too easy for people to get a home they could not possibly afford.

Talk to me folks!

Kex

Adding to your discussion, Strong Bad, here in SoCal, some of us with theoretically good incomes and stellar credit cannot even get a home! A cheaply built 1,400 sq. ft. 1940s tract house on a 7,000 sq. ft. lot in an ordinary neighborhood in Santa Monica now costs $1.5m. These are homes with no double glazing, AC, or insulation. Heating is frequently from rudimentary floor furnaces. If you buy one, you then owe more than $1,000 per month in property taxes!

Now to the 20% thing: who has 20% of $1.5m just lying around available?! It's impossible unless you already owned a home that you can sell. Along with closing costs and Realtor commissions on such huge values it is now estimated that only 3% of the L.A. population can afford the median home price, and we have yet to see a home that is anywhere close to the median price (the cheapest we have seen is about 50-60% over that). Even if you can get your $1m home, you then own something that would not even be worth $200K in many parts of the country.

When home prices get to these levels for homes of this quality, it really is a scary situation, and market readjustments can put even very careful people into a high risk category if they find that they need to sell to change jobs or something similar. Even a 10% reduction in their home value would shatter most American families' emergency savings, especially after financing such a purchase.

PhantomOG

Banks are in the business of making money. Period. Sure, they'll give you a loan, but they want to make money on it so they charge you interest. However, there is a risk that you'll default on that loan. If that happens the bank keeps the house but that doesn't absolve all of the risk. The value of the house could have gone down and the bank might not be able to sell the house for the amount you bought it for. That's why unless you put a substantial amount down payment (~20%), the bank is going to charge you a higher interest rate because their risk is higher. They know that a certain number of people will default and they will lose money, they have to charge a higher interest rate to make up for that.

As for California? Move! I mean, its all going to fall off into the pacific anyways, right?

shack

John to use your scenario. The bank loans you $200,000 and let's you leave your $40,000 in the bank because you have good credit, good income etc...

THEN...any number of things could happen. You lose your job. You spend the $40K living the high life till you get that "perfect" position you know is out there. You pinch one of the strippers on the ****...she turns around and slaps you silly, you trip over your headphone cord, fall an hurt your back and can't work either job...no workmans comp, you use up what little disabilty insurance income you have and again the $40K goes out the door. You take a picture and get sued by whoever and a huge judgement goes against you and....the $40K is gone. Whichever scenario....you're broke and can't make your house payments.

The bank starts to forclose. Even if the market is flat...EVERYONE knows it's a forclosure so the market price comes down 5-10% right off the top. In a bad market (like now) it may be down 20% or more. Then there are the legal costs to foreclose, the maintenance and upkeep, taxes, insurance, utilities marketing expenses (banks have to pay realtors too)...all the sudden that house that was worth $200,000 sells for $190,000, less $5,000 in legal fees, $5,000 in mainenence and repairs (and that figure is assuming you didn't trash the place since you knew you were losing it :rolleyes:) $10,000 in realtor's fee, on top opportunity cost of losing the income from the $200,000 that could be out to someone who is making their payments. If the loan is at 80% of value, there is a reasonable chance in a "normal" market that the bank may come out whole. At 100% LTV chances are they just wrote down a $30,000-$40,000 loss. At an average net profit margin of 2% The banks need to have $2,000,000 in funded loans for a year just to cover the losss on one $200,000 mortgage loan.

The 20% is not some random figure taken out of the air. Historical data says that when a bank forcloses on real estate they recover 80% of the amount the property sold for. EVEN in a rising market.

Therein lies the risk. Good customer, good savings, good job and all the sudden it all goes to hell and the bank is stuck with the loss. Banks are "risk averse" not risk takers. They are not entrepenurs...but have a fiduciary responsibilty to depositors and shareholders. They rent money that is not theirs and simply make money on the difference in what they have to pay depoitors to borrow thier money and what they can charge borrowers to use it. Even if the loan goes bad they have to give the depositor back thier money and that comes from the profit that should go to their stockholders.

Thats why any mortgae over 80% loan-to-value should carry a higher rate in terms of PMI insurance or a higher interest rate.

IT'S NOT A SCAM! It's good, prudent business practice.

strider

shack wrote: »

What the fed is doing may have no immediate effect on mortgage rates.

...........

Long story made short. Car loans and home loans may come down over the next few months...but don't expect them to be 3/4% lower immediately ( or whatever next rate drop is). It will take some time.

That's what I was after, thanks for taking the time to explain. I wasn't expecting a 1:1 ratio between today's news and our rate, but thought it might help.

FWIW, ours did lower 1/8 percent today.

Face

Since I only put 5% down, I had to pay PMI also. But with house values still on the rise, plus having work done to my home, I was able to get it reappraised for 25% more than what it was originally appraised for, and no longer had to pay PMI.

I wonder how the foreclosure rate would be affected if PMI never existed?

It's a scam if you ask me. If someone is unable to make payments and forecloses on the house, the bank keeps the house and is able to sell it to someone else. They aren't losing money.

If anything, auto loans have to be riskier. If someone defaults and refuses to give the car back, the bank has to pay a repo man to come out and look for it. And what if he doesn't find it since it's a little easier to hide a car than a house. Then they have to take the person to court and MAYBE get their money back.

shack

Face wrote:

It's a scam if you ask me. If someone is unable to make payments and forecloses on the house, the bank keeps the house and is able to sell it to someone else. They aren't losing money.

Then you obviously don't know anything about banking and R/E foreclosures.

Strong Bad

Thats all I wanted was a good solid explanation on how they arrive at the figures and percentages that they arrive at. I stand corrected on the SCAM comment. Although, some of the closing cost stories told to me by coworkers scream the word SCAM. But thats another story.

The whole sub-prime lending practice really effed up things. Putting people in homes that there is no way possible they can afford. I remember seeing an article in the newspaper last year about a guy who bought a $250k condo in the N. Va area making $30k a year in income. He didn't last long at all and it went into foreclosure (surprise surprise). He said he was going to sue the lender for misleading him, but I have to ask...how the hell did you think you could afford a loan of that size making $30k?

Kex, do like Lex Luthor did in the first Superman movie. Go buy alot of worthless desert land and when California sinks into the ocean...CHAA CHING! I see it in your future...Costa Del Kex!

Face

shack wrote: »

Then you obviously don't know anything about banking and R/E foreclosures.

Can you explain for us?

shack

Face wrote:

Can you explain for us?

I already did....Post #18.

And banks are not able "make a profit" off of a foreclosed property. When a propety is sold, the proceeds go first to cover the first mortgage and any expenses incurred due to the foreclosure, then to any amounts and expenses due to subordinate lenders and if any funds are left over then back to the mortgagor.

PhantomOG

I think they probably were some shady mortgage brokers, but how far is the government supposed to go to prevent people from hurting themselves through their own stupidity? We can't have a man in black standing on every corner protecting people from blowing their life savings on magic beans.

tonyb

Shack pretty much nailed it.Two words come to mind...Personal Responsibility.
People scream when they can't afford a house,laws are relaxed to afford them that opportunity,now they scream it's the banks or mortgage peoples fault that they can't afford it.So basically,your telling me that alot of people are too dumb to know what they can/can not afford and need someone else to tell them.Nobody is twisting your arm to take the loan.We like to have stuff,as a society,better cars,homes,latest gear,clothes,and so forth.So lets blame everyone else for my stupid decisions.Fact is,real estate has climbed so fast in so little time the last few years,an adjustment is/was needed.Personal responsibility folks,no more ,no less.

ohskigod

Strong Bad wrote: »

The whole sub-prime lending practice really effed up things.

yep, that about sums it up. decisions like this arent made on a case by case basis, its all policy and procedure. Lenders got Dicksl@pped in subprime, therefore all lending practices tightened up like the pope's **** shoot (hitting you in the gut directly)

Ironic thing is, house prices drop and people still cant get houses, hence house costs drop more, kills economy, and so on, and so on. when this all went down and people said it would last 6 months, I tried like hell not to laugh, this is going to take close to a decade to shake.

tonyb

And who do you guys think the whole sub prime buisness was aimed at?
Who is screaming the loudest?

Maurice

you got it ohskigod. Being a R/E investor for the last 8yrs, I could see this coming at least 3yrs ago. Prices in SoCal went soooo high, something had to give. With regards to the lenders, true lots of people bought homes they couldn't afford, but the lenders hands are just as dirty. They gave out all those loans because they were making money hand over fist. They were very very aggresive to the point of EVERYONE out here getting at least 3 unsolicited calls daily from lenders pushing refi's. Now its a mess, and wont be cleaned up for quite some time.

The reason the subprime market imploded is because the "secondary market" decided to no longer buy those loans, which meant lenders couldn't offer them anymore. But just hold on to your hat, because between now and the end of March, there are nearly 3mil loans scheduled to adjust. And at least out here in cali, values are falling like lead balloons. My home lost just over 100k in equity last year alone.

Be smart, buy gold.:cool:

shack

There are a lot of fingers to point at in the whole subprime mess. The lenders are the most at fault for losing money. THEY IGNORED conventional wisdom and sound lending practices and are paying the price. This goes for banks, and any other investors who purchased secondary market paper (insurance companies, pension funds, etc..).

That was the first problem...and while substantial...there are other factors as well. Corrupt mortgage loan brokers who would do whatever it took to get a borrower qualified was a huge factor. They would falsify applications, appraisals, lie about terms, not give proper disclosure...in essence whatever it took to get the loan approved to get their commission. R/E brokers and appraisers were right there in bed as well. The appraisers are the one's who piss me off. I've fired more that one who comes to me and asks "What value do you need to make this work?" I hire them to tell me what the property is "reasonably worth"...not what it takes to make my loan. I want to know that I can recover the amount I loan.

Last but not least are the federal regualtors who oversee the banks and mortgage brokers. They turned a blind eye to the issues IMO in order to not stall the economy. A downturn and correction a few years ago would have been better than what we have now. And again I reinterate....The "EVERYBODY DESERVES TO OWN A HOME" mentality had a lot to do with the feds position.

Lou, It won't take a decade. Once the backlog of inventory of new homes is cleared up and 50-75% of the highly leveraged homebuilders are gone, demand for existing homes will start to rise again. If interest rates stay low there will be plenty of mortgage money for qualified buyers. Once the existing home inventory is thinned out the demand for new homes will pick back up very quickly. The MARKET should be back to full speed in 3± years. The effects may linger but the home market will rebound because the demand for housing will continue as long as there is population growth.

Values...It will take a while for them to get back. They were over-inflated due to speculation and bad lending to non-qualified borrowers. I hope they stay down for a while to reflect "true" values.

Maurice

shack wrote: »

There are a lot of fingers to point at in the whole subprime mess. The lenders are the most at fault for losing money. THEY IGNORED conventional wisdom and sound lending practices and are paying the price. This goes for banks, and any other investors who purchased secondary market paper (insurance companies, pension funds, etc..).

That was the first problem...and while substantial...there are other factors as well. Corrupt mortgage loan brokers who would do whatever it took to get a borrower qualified was a huge factor. They would falsify applications, appraisals, lie about terms, not give proper disclosure...in essence whatever it took to get the loan approved to get their commission. R/E brokers and appraisers were right there in bed as well. The appraisers are the one's who piss me off. I've fired more that one who comes to me and asks "What value do you need to make this work?" I hire them to tell me what the property is "reasonably worth"...not what it takes to make my loan. I want to know that I can recover the amount I loan.

Last but not least are the federal regualtors who oversee the banks and mortgage brokers. They turned a blind eye to the issues IMO in order to not stall the economy. A downturn and correction a few years ago would have been better than what we have now. And again I reinterate....The "EVERYBODY DESERVES TO OWN A HOME" mentality had a lot to do with the feds position.

You hit the nail right on the head shack. LO's, AE's, Brokers, appraisers, & regulators ALL screwed this thing up bad. But money was being made and the economy "appeared" strong so regulators looked the other way. As for me, I'm gonna sit on the side lines until prices have bottomed out, then start picking up pieces and hold em' til the next upswing. The greatest wealth is always built during hard economic times by those who have the means to scoop up assets when they are selling cheap. Some of the greatest fortunes ever made in this country came out of the depression.