| The forecasts and opinions reflects the views of Rob Schumacher as of 3/18/08, are not necessarily those of Van Kampen, and may not actually come to pass. Information in this report does not pertain to any Van Kampen product and is not a solicitation for any product.
Is a 75 basis point reduction in the Federal Funds rate a disappointment? After all, investors, pundits and strategists alike clamored for 100 basis points.
At its regularly scheduled March 18, 2008, meeting the FOMC, in an 8-2 decision, reduced the Federal Funds rate to 2.25% from 3.00%. The Discount Rate, so critical to the TAF and TSLF programs, was reduced to 2.50%. The accompanying statement reiterated concerns over slowing economic growth and rising inflationary pressures.
No kidding, and now the rest of the story.
The unprecedented moves by the FOMC to resolve the ongoing liquidity crisis in the financial markets did little to address a root cause of the problem—mortgage resets.
Without going too far down an old trail 1) mortgage rate rises 2) homeowner can’t or won’t pay 3) defaults rise 4) repackaged and sold loan impairs CDO, CLO, CMO 5) ratings agencies downgrade 6) mark to market valuation, etc, etc. However, the Federal Funds rate is now at its lowest point since February 2005. Therefore, all adjustable rate mortgages funded in the 2005, 2006 and 2007 ($700 billion?) are potentially looking at a reference rate for reset LOWER or equal than the initial contract reference rate. This is not to suggest today's FOMC action as a halt to declining real estate values in some areas of the country. On the other hand it does argue that a large source of homeowner financial distress may begin to unwind. And as I see it, such a development is a large step in the return to normalcy.
|
