The Federal Reserve gave the market a much-needed boost and vote of confidence by lowering both the Fed Funds Rate and the Discount Rate on Tuesday. The stock market rallied as investors swooned with optimism. But how excited should consumers really be?
Many people have the impression that the rate cuts will help alleviate some of the pressure on the housing market, which is very timely given the massive number of mortgages expected to adjust in the coming months. However, relief will be in home equity lines of credit, credit cards, car loans, etc. — not as much in mortgage rates. In other words, the real estate market is not about interest rates right now. The problem plaguing the market is the consumer’s ability to get a mortgage — not getting a low interest rate.
Put another way, imagine interest rates on mortgages drop and drop and drop. Sounds great, right? Not really. As banks and other lenders have tightened their underwriting criteria and lending guidelines, many people simply won’t be able to get the loan they want or need. Take, for example, someone who took out a mortgage two years ago with a good credit score around 680, an 80 percent loan-to-value, and perhaps stated their income as many have done. Yet consider that real estate values have been softening over the past couple of years. Now combine the soft real estate market with tougher underwriting requirements, and you have a recipe for disaster. Perhaps the new loan guidelines might require a 700 credit score, 75 percent loan-to-value (they can borrow less), and stated income simply isn’t an option. Refinancing just isn’t an option here. It is no wonder foreclosures are up 117 percent from this time last year and 36 percent from just last month.
The reality being that there really is not much to get excited about.