Fed Moves the Discount Rate – Should You Care?
Posted On: February 24th, 2010 by James Posted In: Government Actions • Mortgage Rates
A couple of days ago, Ben Bernanke lowered the “discount rate”. This was seen as a surprise, and sent the futures markets into a freak out! But the CPI number came out and was/is awesome! The reading indicates that inflation is completely under control for the time being. The seismic shift in rates we’ve just seen (last Thursday Feb 18th) is totally from the Fed move to up the discount rate.
The discount rate literally has zero true effect on mortgage rates (except indirectly as an indicator of future fed policy). Many believe this was a concession from Bernanke to other members of the FED who are more “hawkish on inflation”. Bill Gross from PIMCO called this action FED groundhog day- where they poked their heads out and saw their own shadow! Now that they’ve seen the effect on rates, they will likely be more cautious in the future. I believe that the Fed will not allow rates to get too far above 5.5% this year. When they stop their purchasing program at the end of Q1, and rates skyrocket, I would bet they get back in the MBS buying game.
At the time I write this post, we’ve had 3 full trading days since the move, the bond market has just about completely recovered its losses from that day. All is well….. FOR NOW!
The reverse annuity mortgage is another concept that was suggested in the 1970s by advocates of reverse mortgages. Under a reverse annuity mortgage (RAM), equity in the home is used as
security for a loan. An annuity is purchased with the loan proceeds and the borrower receives monthly annuity income, less mortgage interest. The borrower pays only interest on the loan repayment of the principal is deferred until the death of the owner, the sale of the property, or some prescribed date.