Real Estate Update in Palo Alto & Los Altos

The central bank’s efforts to improve the flow of money through the nation’s gridlocked financial system should help large banks and investment companies, but any immediate benefits for homeowners and homebuyers are far less likely, according to Jeff DerGurahian, senior vice president of capital markets at Metrocities Mortgage in Sherman Oaks, Calif.

“This (action by the Fed) is really more just to help primary dealers and their larger clients work their way through the liquidity crisis that we are in right now,” he says. “It does not have that much effect for homebuyers.”

That’s because, DerGurahian explains, the decision to lend money resides not with the Fed, but with lenders, who are “still very skittish about extending credit to anyone except the most qualified borrowers who could already obtain financing.”

‘Giant insurance policy’ pushes down interest rates
Not surprisingly, other experts offered alternative interpretations of whether the Fed’s actions would aid home-loan borrowers.

Dan Green, a mortgage planner in Cincinnati, and author of TheMortgageReports.com, says the Fed’s actions had already resulted in lower interest rates on conforming loans, which meet Fannie Mae and Freddie Mac guidelines.

The Fed’s acceptance of such mortgage-backed securities as collateral on loans to primary dealers won’t stop foreclosures or prop up home prices, but instead acted as “a giant insurance policy for every investor in mortgage debt” and that “has helped mortgage rates come down,” he says.

The effect hasn’t encompassed nonconforming loans, according to Green.
Types of non-conforming loans:
•     Jumbo loans: which exceed local-market conforming loan limits.
•     Stated-income loans: which don’t require borrowers to document their incomes.
•     Subprime loans: which are offered to borrowers who have impaired credit.

“Any mortgage applicant using Fannie Mae or Freddie Mac products is going to see downward pressure on mortgage rates because of the explicit guarantee that just came from the Fed,” Green says.

The new “jumbo light” loans, which until recently were larger than the conforming loan limit but are now within the guidelines, may or not be affected, Green adds. That uncertainty is due to the newness of this category and a re-pricing trend that’s resulted from lenders’ reassessment of risks in the mortgage markets.

What the Fed did:

The Fed’s actions were highly technical in nature, but here’s a simplified four-point summary of what the Fed did.
Fed’s recent action:

•     Offered billions of dollars in new loans to banks and large financial institutions, known as “primary dealers,” that borrow money directly from the central bank.
•     Extended the terms of some of those loans to 28 days instead of the customary overnight period.
•     Offered to accept certain high-quality securitized mortgages as collateral for some of the loans.
•     Affirmatively stated that more action would be taken if necessary.

The Fed’s willingness to accept mortgage-backed securities as collateral is important because investors have had difficulty trading those securities on the open market, and the uncertain value of those securities has contributed to the liquidity crisis in the financial markets.

Interest rate cut could help more homeowners
Consumers should focus not on the Fed’s actions, but rather on the higher loans limits for conforming and Federal Housing Administration-backed mortgages, DerGurahian suggests. Those higher limits may be an opportunity for consumers to buy a home or refinance their current mortgage.

Another interest-rate cut by the Fed would also be more beneficial for consumers than this week’s liquidity moves, DerGurahian adds.