First, let’s start with some specific definitions of the rates that were lowered by .50% this week:

Federal Funds Rate

The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.

This is what news reports are referring to when they talk about the Fed changing interest rates. In fact, the FOMC sets a target for this rate, but not the actual rate itself (because it is determined by the open market).

Discount Rate

The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.
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This type of borrowing from the Fed is fairly limited. Institutions will often seek other means of meeting short-term liquidity needs. The Federal funds discount rate is one of two interest rates the Fed sets, the other being the overnight lending rate, or the Fed funds rate.

As you can see by these definitions, neither the Federal Fund Rate nor the Discount Rate has any direct reflection on mortgage rates and no one should believe fixed mortgage rates will go down as a direct result of the Federal Reserve’s actions.  A “ripple” effect will be that the Prime Rate will go down by .50% to 7.75%.  Again we need a specific definition -

Prime Rate

The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank’s best customers consist of large corporations.

Default risk is the main determiner of the interest rate a bank will charge a borrower. Because a bank’s best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan.

Many banks tie their Home Equity Loan products to the Prime Rate.  If that is the case with your home equity loan, you could get a pleasant surprise when your next monthly statement arrives at your house.  Additionally, many revolving credit cards are tied to the Prime Rate and they, too, will benefit from the Federal Reserve’s action.  In the end, almost all mortgage banking firms price their long term (15-30 year) fixed rate products based on the activity in the Treasury Bond Market, but that lesson will have to follow on another day!.

Bottom Line – Don’t expect any reduction to 30-yr fixed rates as a result of this week’s Federal Reserve activity.  In reality there’s been a slight rate increase since Tuesday, but when 30-yr fixed rates are in the low 6% range, how can anyone be unhappy??

I’ll be available all weekend so don’t hesitate to call – 503/970-9714

Bob Milano
Branch Manager/Sr. Mortgage Banker
Directors Mortgage Inc.
4550 SW Kruse Way, Suite 340
Lake Oswego, OR 97035
Phone:  503.636.6000  Ext. 165
Fax:  971.327.2898   Cell: 503.970.9714      
E-mail:  bmilano@directorsmortgage.net
Website:  www.homeloansbybob.com