My New Blog

Are we having fun yet? Hang onto your hats because the roller coaster ride is not over!

The Federal Reserve dropped the Fed Funds Rate by three quarters of a percent signaling their concerns of the growing financial crisis. This follows a Sunday cut of the discount rate by a .25 pt. The rate cut was the first time in 30 years that such a cut has taken place on a special Sunday meeting.

This most recent action by the Fed is as a result of the continued volatility in the markets after Fridays announcement by the number 5 ranked investment banking firm in the U.S. Bear Stearns announced problems with liquidity causing their stock price to drop from $70 a share to an agreed upon sale of the company to J.P. Morgan Chase at $2 per share on Monday. With the announcement by Bear Stearns on Friday, the Fed also agreed to fund up to $30 Billion of illiquid high risk assets that are in the Bear Stearns portfolio to aid the Buyer with the transaction.

Interesting side note - Joe Lewis, a British born billionaire who owns a 10% stake in Bear Stearns has lost over a $1 Billion on his investment in two trading days. For all of those concerned about foreign investment in to the U.S. this is an excellent wake up call. No investment comes without risk as Mr Lewis can attest to. Foreign investment and acquisitions will help prop up the markets and infuse the necessary funding required to create more liquidity.

Also contrary to what many are saying, had the Fed not taken the aggressive measure of facilitating this sale and propping up Bear Stearns, the failure of Bear Stearns could have triggered a systematic collapse of the markets with horrendous consequences. Clearly the Fed is watching the markets very closely and taking an extremely aggressive position to make sure further erosion is minimized. The Fed Rate cuts will ultimately be a big boost to the economy but I have yet to see them loosen up the credit crunch that has taken a strangle hold on the financial markets. Without adequate liquidity in the markets, the economic recovery will take much longer even with the Fed Rate cuts.

Given the size and scope of the current crisis, the Federal Reserve alone will not able to turn this around. Intervention by more government monetary agencies such as the European central bank and others will be necessary to restore some confidence to return to normalcy. Thus far it appears the Federal Reserve has taken the lead and others have been slow to follow.

In regards to the new higher conforming loan limits, the pricing has just been released and is not as favorable as was hoped. It is about 1% higher than rates for conforming loans of $417,000 and under but also, about 1% lower than jumbo loans. As I suspected, the pricing landed somewhere in the middle.

Until next time,

As always..your loan conusltant for life,

Sharon Cohen