Prime Rate

Fourth FOMC Meeting of 2009 Adjourned: Prime Rate Remains at 3.25%

2009-06-24T14:58:00.007-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its fourth monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain at the current 3.25%.

Here's a clip from today's FOMC press release:

"...Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

Futures Market 100% Certain Prime Rate Will Hold At 3.25% After The June 24 FOMC Meeting

2009-06-05T19:45:00.004-04:00

Back in March of this year, the Fed began buying long-term U.S. Treasury securities with a two-fold objective: a) increased demand would produce lower yields, which would in turn cause the rates associated with 15- and 30-year fixed-rate mortgages to decline, and b) lower yields would also stem the flow of capital to the safety of government debt by souring the Treasury security milk (the government would rather have capital moving to riskier investments like stocks and corporate debt, which would be much better for the economy.)

For a while, it looked like the Fed got exactly what it wanted with regard to mortgage rates. According to the mortgage giant Freddie Mac, the average rate on a 30-year fixed-rate mortgage was 5.47% on December 11, 2008. The average rate dropped below 5% during the winter and spring of this year, declining to 4.78% twice during April.

But now rates may be starting to trend upward. Earlier today, Freddie announced that the average mortgage rate rose from 4.91% last week to 5.29% for the seven-day period that ended today.

So if you've been sitting on the fence waiting for mortgage rates to bottom out before diving into the housing game, you may want to consider jumping in now.

Then again, you may want to take your chances and bet that rates will head south again in the future. That's because the Fed plans to continue buying mortgage-backed securities during the rest of 2009, and long-term Treasury securities into the fall of this year, which will keep downward pressure on rates.

Why Did Mortgage Rates Spike?

The average mortgage rate jumped because investors reacted positively to the not-as-bad-as-expected May employment situation report released by the Labor Department Friday. Wall Street economists were expecting non-farm payrolls to decline by 530,000 last month, but the figure for May came in at 345,000. 345K is still a lots of pink slips, but it’s the softest monthly decline since September of 2008. Investors saw this as sign that an economic recovery may be in the offing, and moved enough capital from the safety of government debt to cause bond yields to spike. As demand for bonds wanes, the yields associated with bonds rises, and as long-term bond yields rise, so do the rates on 30-year FRM's.

Investors are also worried that excessive government spending, combined with the Fed's quantitative easing (a.k.a. printing money), will erode the value of the dollar; that inflation will surge at a pace the Federal Reserve won't be able to manage easily, when the U.S. economy returns to prosperity. Inflation and a weak dollar are both anathema to bond investors.

Here is how the yield on the benchmark 10-year Treasury Note looked over the past 16 days:

5 Jun 2009: 3.86%
4 Jun 2009: 3.72%
3 Jun 2009: 3.55%
2 Jun 2009: 3.64%
1 Jun 2009: 3.71%
29 May 2009: 3.46%
28 May 2009: 3.67%
27 May 2009: 3.69%
26 May 2009: 3.49%
22 May 2009: 3.45%
21 May 2009: 3.35%
20 May 2009: 3.20%
19 May 2009: 3.24%
18 May 2009: 3.21%
15 May 2009: 3.12%
14 May 2009: 3.11%

Recent economic news that managed to seduce the bull out of recession-weary investors may well have been the siren song of an economic false dawn. During the Great Depression, there were many instances where the economy looked like it was getting better, when in fact economic conditions were only to get worse.

Home values across much of the country probably won't improve in a significant way during 2009, so whether you choose to get a FRM now or wait a few months, you're probably going to get a deal that'll have you smiling for a while.

Here's an interesting calculation from the good folks at Bloomberg.com (referring to this week's rate spike that Freddie announced today) :

"...This week’s rate increase translates into an additional $31.79 a month for a buyer purchasing the median-priced U.S. home of $170,200 with a 20 percent down payment..."

For a weekly perspective on mortgage rates, stay tuned to this webpage.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the June 24^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the June 24^TH, 2009 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

FOMC Meeting Schedule (Tentative) for 2010

2009-06-04T18:39:00.004-04:00

Earlier today, The Federal Open Market Committee (FOMC) released its tentative monetary policy meeting schedule for 2010. The FOMC doesn't always stick to the exact dates on the schedule (hence tentative), but they do always meet at least eight times per calendar year.

Why is this schedule important to you? Because it's at these monetary policy meetings that The FOMC votes on whether to raise, lower or make no changes to The Fed Funds Target Rate, and when the Fed Funds Target Rate changes, the U.S. Prime Rate (also known as the fed, national or WSJ Prime Rate) will also change.

Here's the tentative schedule for 2010:

January 26 - 27, 2010

March 16, 2010

April 27 - 28, 2010

June 22 - 23, 2010

August 10, 2010

September 21, 2010

November 2 - 3, 2010

December 14, 2010

Futures Market 97% Certain Prime Rate Will Hold At 3.25% After The June 24 FOMC Meeting

2009-05-14T20:40:00.009-04:00

A week ago, the Federal Reserve released the results of the Supervisory Capital Assessment Program (SCAP), commonly known as the U.S. bank stress test. The goal of the stress test was determine if America's biggest banks have enough capital to continue operating normally if the recession gets worse than economists are currently projecting. Nineteen of America's largest financial institutions were put to the test to see if they would be able to provide consumers and businesses with credit while concurrently contending with losses. The results are summarized in the following graphic:

Image courtesy: CBS News

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 97% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the June 24^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the June 24^TH, 2009 FOMC monetary policy meeting is adjourned: 97% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Third FOMC Meeting of 2009 Adjourned: Prime Rate Remains at 3.25%

2009-04-29T14:39:00.001-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its third monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S., national or Fed Prime Rate) will remain at the current 3.25%.

Here's a clip from the FOMC press release:

"...Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

Second Lien Plan Will Help Homeowners Struggling with Second Mortgages

2009-04-28T19:29:00.003-04:00

The Obama administration has a new plan to help homeowners who are struggling to keep up with their second mortgages. It's called the Second Lien Program, and it will be active in about a month. Here's a clip from the Treasury Department website:

"...The Second Lien Program announced today will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver a comprehensive affordability solution for struggling borrowers. Second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, servicers participating in the Second Lien Program will automatically reduce payments on the associated second lien according to a pre-set protocol. Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by Treasury, allowing servicers to target principal extinguishment to the borrowers where extinguishment is most appropriate..."

And here's some more insight from a Bloomberg article:

"...Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans in the fourth quarter, the highest in records going back to 1972, according to figures from the Mortgage Bankers Association in Washington. Loans in foreclosure rose to 3.3 percent, up from 2.04 percent a year earlier.

Obama’s overall plan to reduce foreclosures by modifying mortgages targets as many as 4 million homeowners. As many as half of the participants in the mortgage-modification program may be eligible for the second-lien assistance, administration officials said.

Congressional Action

The administration also intends to urge action by Congress to make Hope for Homeowners easier to use and more accessible, the administration officials said. The program is primarily aimed at borrowers who are “underwater,” owing more on their mortgages than their homes are worth.

No other legislative changes are required for the administration’s revised housing plans to take effect, the officials said.

The new measures may ease mortgage investors’ concerns that the biggest banks and servicers would be tempted to rework too many loans under the program in order to bolster their home- equity portfolios, Laurie Goodman, an analyst at Amherst Securities Group LP in New York, said in a telephone interview.

“Certainly, it appears that the Treasury has listened to first-lien investors,” Goodman said. Today’s announcement “goes a very long way toward addressing their objections,” she said.

Second-Lien Program

The second-lien program should be up and running in about a month, the officials said. They estimated that about 75 percent of all U.S. mortgages are managed by servicers that already have agreed to participate in the government’s modification programs. Servicers are administrators in the relationship between lenders and borrowers.

The mortgage initiative offers subsidies to servicers and lenders, including bond investors, to help lower borrowers’ housing payments to 31 percent of their income. Because modifications are voluntary, the Treasury is offering incentive fees to encourage participation in the program.

The $12,000 in possible incentive fees has several components. Many of the fees are paid over time, as an incentive for borrowers and servicers to strike deals that will last.

When modifying first mortgages, servicers can receive $1,000 up front, and $1,000 per year for three years. If the mortgage being modified is eligible and not yet delinquent, they can also receive $500, for a maximum possible total of $4,500.

Reducing Principle

Then borrowers who make their new payments can get up to $1,000 per year for five years, up to a total of $5,000. This money is paid to the lender or investor who holds the first mortgage, and it reduces the borrower’s principle.

When a second mortgage is also modified, the servicer on that mortgage can get a $500 up-front fee, plus $250 per year for three years, for a maximum possible total of $1,250. The borrower also is eligible for an additional $250 per year for five years, again paid toward the principle on their primary mortgage..."

"...The Treasury announced today that second-mortgage holders will be given a subsidy to reduce the borrower’s interest rates to as low as 1 percent. Alternatively, the lien holder could receive as much as 12 cents on the dollar to retire the debt. There also are incentives in place for first-mortgage holders.

In the case of a sample borrower with a $250,000 interest- only first mortgage with a 6 percent rate, leading to housing expenses equal to 40 percent of the borrower’s income, the government may pay about $2,625 annually to help reduce those payments for five years, according to an Amherst Securities Group report in February.

If that borrower also had a $43,942 second mortgage with an 8.6 percent rate, the government may bear half of the $2,336 annual cost of reducing the payment for five years under the plan announced today, according to data released by the Treasury..."

Even more insight from a recent Associated Press article:

"...During the housing boom, lenders readily gave out "piggyback" second loans that allowed consumers to make small down payments or avoid them entirely. While home prices soared, such mortgages were even extended to borrowers with poor credit scores and people who didn't provide proof of their incomes or assets.

But those loans, which are attached to about half of all troubled mortgages, have been an obstacle to efforts to alleviate the housing crisis. That's because borrowers who are trying to get their primary mortgage modified at a lower monthly payment need the permission of the company holding the second mortgage.

The new plan aims to get rid of that roadblock, administration officials said. "We're offering even more opportunities for borrowers," Treasury Secretary Timothy Geithner said in a statement.

The new incentives are estimated to help up to 1.5 million borrowers with second mortgages, Housing Secretary Shaun Donovan said. While data on how many household have been helped by the Obama administration's housing plans are not available, Donovan told reporters there have been "hundreds of thousands of applications."

The administration's second mortgage initiative will be funded out of $50 billion in financial rescue money already allocated. As an incentive to modify second loans at lower interest rates, mortgage companies would get $500 upfront for each modified loan, plus $250 a year for three years as long as the borrower doesn't default.

Similarly, borrowers would get up to $1,000 over five years applied to the principal balance of their primary mortgage, and the government would pick up part of investors' costs as well. Lenders would also be given the ability to remove second mortgages entirely in exchange for larger government payouts.

The administration also plans to give mortgage companies $2,500 payments to entice them to participate in the "Hope for Homeowners" program. It was launched by the government last fall but has so far has been a failure, proving unattractive to banks required to absorb large losses.

It was supposed to allow 400,000 troubled homeowners to swap risky loans for traditional 30-year fixed-rate mortgages with lower rates. Instead only one loan has received final approval, with about 50 more in the works and fewer than 1,000 applications.

The program has been stymied by high fees, complex regulations and a requirement that banks absorb large losses. The Obama administration supports legislation in Congress to ease those restrictions.

Meanwhile, the faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm..."

Futures Market 100% Certain Prime Rate Will Hold At 3.25% After Wednesday's Fed Meeting

2009-04-27T16:21:00.042-04:00

The Fed's next decision on short-term interest rates will be on Wednesday, and the futures market is now 100% certain that the Federal Open Market Committee (FOMC) will vote to leave short-term rates at their current levels. This means the U.S. Prime Rate will remain at the current 3.25%.

Rate News from Canada: Overnight Rate Now 0.25%

Last Tuesday, the Bank of Canada, which is Canada's central bank, cut its benchmark overnight target interest rate from 0.5% to 0.25%, which in turn caused the Canadian Prime Rate to drop from 2.50% to 2.25%. Canada's overnight rate is now on par with the Fed's benchmark rate. 0.25% is a brand new record low for Canada's central bank (the bank was founded in 1934) and it's the lowest it can possibly go. Here's a clip from the press release issued last week:

"...In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank's January Monetary Policy Report Update, with weaker-than-expected activity in all major economies. Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual. The economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011. Given significant restructuring in a number of sectors, potential growth has been revised down. The recovery will be importantly supported by the Bank's accommodative monetary stance..."

In other economic news:

According to the latest Commerce Department report on new home sales, the cost of a brand new home at the end of last month was about the same as it was at the end of 2003. The latest figures were released last Friday, with the median price on a newly built home dropping from $208,700 during February to $201,400 during March. Click here for historical prices and a chart.
Preliminary existing home sales figures were released by the National Association of Realtors® last Thursday. The report indicated that the median price on a previously occupied home has increased since the start of 2009:

-- January: $164,800
-- February: $168,200
-- March: $175,200

Click here for historical prices and a chart.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the April 29^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the April 29^TH, 2009 FOMC monetary policy meeting is adjourned: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 97% Certain Prime Rate Will Hold At 3.25% After The April 29 Fed Meeting

2009-04-06T19:04:00.048-04:00

Last Friday, the Labor Department announced that American employers shed another 663,000 jobs last month, and that the unemployment rate rose from 8.1% for February to 8.5% for March. Employers have eliminated over 5 million jobs since the recession began at the end of 2007, and the total number of jobless people in the USA is now 13.2 million.

On Thursday, the Labor Department reported that there were 669,000 new claims from unemployment benefits during the week that ended on March 28, 2009. During the week that ended on March 21, there were 5,728,000 people collecting an unemployment check across the country.

In housing news, the latest S&P/Case-Shiller report on home prices was released last Tuesday. The following are some notable price declines for the January 2008 through January 2009 period:

San Francisco: -32.4%
San Diego: -24.9%
Phoenix: -35.0%
Miami: -29.4%
Los Angeles: -25.8%
Las Vegas: -32.5%
Detroit: -22.6%

Over the past 9 years, Detroit has fared the worst of all the major metropolitan areas. The home price index for Detroit came in at 77.56 for January 2009. The baseline score of 100.00 is associated with home prices during January 2000. So, the price of a typical, single-family home in Detroit was down 22.44% when comparing its price during January 2000 to its price during January 2009. Yikes! In contrast, and for some perspective, the index for the New York City metro area came in at 181.28, which indicates an increase of 81.28% for the same period.

Also from Tuesday, The Conference Board reported that its Consumer Confidence Index (CCI) was a very somber 26.0 during March 2009. For the CCI, the baseline 100.00 score is pegged to 1985 survey data.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 97% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the April 29^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the April 29^TH, 2009 FOMC monetary policy meeting is adjourned: 97% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Homebuilders Offering Mortgage Rates Below 4 Percent

2009-04-02T13:46:00.013-04:00

Homebuilders like Lennar, Hovnanian Enterprises and Toll Brothers are offering qualified customers mortgage rates below 4% in an effort to generate sales. Here's a clip from a recent WSJ article:

"...As mortgage rates fall to near historic lows, some home builders are offering even lower interest rates, in an effort to lure buyers amid the slow spring selling season.

The latest sales promotion: Lennar Corp. is offering a fixed 3.625% rate over the life of a 30-year fixed rate mortgage. The deal is besting average rates that have fallen below 5% nationwide, but it comes as other builders are reporting mixed results from similar incentives.

Hovnanian Enterprises Inc.'s recent offer of a 3.99% rate sparked "underwhelming" interest from home buyers, says Dan Klinger, president of the builder's mortgage operation. "It wasn't like we needed crowd control," says Mr. Klinger.

Earlier this year, luxury builder Toll Brothers Inc. was offering a 3.99% interest rate in many of its developments nationwide, but today that rate is no longer available nationally. Toll executives have said that the promotion boosted traffic to its Web site, but the low rate alone hasn't been enough to break weak consumer confidence that is still weighing on the market.

Bargain mortgage rates are the latest sales strategy from builders struggling to sell homes. Mounting unemployment continues dogging the sector, because people without jobs, or those afraid of losing one, are unlikely to purchase, no matter how low the rate.

Since the downturn began, builders have tried everything from free tropical vacations to subsidized closing costs in order to move inventory. They then cut costs and even offered layaway plans for down payments.

For home buyers, the low mortgage rates from the builders represent significant savings. But be wary of the fine print: Lennar is offering the 30-year rate "on select homes," and the loan amount cannot exceed $417,000. The minimum credit score is 700, which is a relatively high score in the current environment. In addition, it could be hard for buyers to come up with the minimum 10% down payment that Lennar requires to qualify for the 3.625% rate.

The builders' low rates may help first-time home buyers, "but it's not going to goose the trade-up market," says Thomas Lawler, a housing economist. "That's because most trade-up buyers use the equity from their previous home for a down payment, and that equity often doesn't exist any more."

KB Home is one builder that isn't chasing buyers with low mortgage rates, for now. Instead, the Los Angeles builder is focusing on offering smaller houses that are competitively priced with foreclosed houses. The strategy seems to be helping KB, which reported on Friday that its sales improved more than some analysts expected..."

New Mortgage and Mortgage Refinance Tips for 2009

2009-03-28T12:19:00.000-04:00

On Wednesday, March 18, 2009, the Federal Open Market Committee (FOMC) of the Federal Reserve voted to keep short-term interest rates steady at near zero percent. In the press release issued that afternoon, the Fed also announced plans to buy up to $300 billion-worth of long-term Treasury securities from the Treasury Department, and purchase a whole lot more mortgage-backed securities from agencies like Fannie Mae and Freddie Mac. The primary goal of these Fed actions is to keep mortgage rates down and, so far, these specific tactics have been working. Since last week, the average interest rate associated with 30-year, fixed-rate mortgages has been moving lower and is expected to fall and stay below 5% in the near future. The prospect of lower mortgage rates has many homeowners thinking about refinancing their current home loans, and has lots of renters making plans to jump into the housing market. Here are some tips that both refinancers and new buyers should keep in mind:

Considering the staggering pace of price declines across the country, prospective homebuyers should try their best to get immediate equity. This is accomplished by negotiating a price for a home that's lower than the lender's appraised value of the home. If successful, the new homeowner gets to move into a home with immediate equity, a substantial plus in the current housing market.
First-time homebuyers who want to get the best possible home loan deal should have their financial house in perfect order before applying. Subprime lending is out and old-fashioned lending standards are back in. Prospective buyers should:
- be prepared to put at least 20% down,
- be ready to provide solid proof of income,
- improve their debt-to-income ratio by reducing or eliminating any credit card debt, and
- try their best to get their FICO credit score above 760.
Both new homebuyers and refinancers can get free access to the credit reports that lenders use by visiting AnnualCreditReport.com, a website created via Congressional mandate. A free report from each of the three consumer reporting agencies -- TransUnion, Experian and Equifax -- is available at no cost every 12 months. Check for errors; if mistakes are found, don't hesitate to dispute any and all inaccurate and derogatory items..
A new homebuyer who has a great credit score, strong, confirmable income and plenty of money to put down may be able to find a mortgage rate below 5%, as long as the loan isn't jumbo or superjumbo in size (a jumbo mortgage is a home loan above $417,000, while a superjumbo is more than $650,000.) While it's possible to find a rate below five percent on a jumbo mortgage, the odds are not good.

The same holds true for refinancers looking for a jumbo or superjumbo home loan refinance.
For both new buyers and refinancers, it's important to understand what a no-cost mortgage loan or a no-cost refinance loan really means. "No cost" does not mean that closing costs (also known as settlement costs) have been erased. It means that the closing costs will be factored into the interest rate associated with the loan. Of course, this also means that, all other things being equal, the interest rate associated with a no-cost mortgage will always be higher than one where the borrower pays the closing costs up front.

And there's one more distinction to pay attention to: the difference between a no-cost mortgage and a no-cash mortgage. "No cash" means that the closing costs will be added to the balance of the amortized loan, and the borrower will pay these costs over time. This is a very important distinction, because the borrower will pay interest on any and all fees added to the loan balance.

Don't be intimidated by all these details. Use one of the many free mortgage calculators available on the Internet to figure out how much your loan is going to cost you. Remember that a "point" is simply a percentage point, so with a $200,000 mortgage that has an interest rate of 5% plus 1 point, the "point" will cost this borrower one percent of $200,000, or $2,000. Easy.
A homeowner who has done the math and figured out that refinancing could save lots of money over time, and who has committed to refinancing their mortgage, should not procrastinate. In general, home values have been declining across the country, and may continue doing so for the rest of the year. Declining home values translate to declining equity, and the typical mortgage lender will offer the best refinance deals to homeowners who have at least 20% equity in their home (25% for a cash-out refinance.) A homeowner may be able to refinance a home that has less than 20% equity, but these loans are not easy to find in the current economic environment, and the terms associated with such loans wouldn't be attractive.
Homeowners who want to refinance but can't because they owe more on their home than their home is worth (also known as "upside down") should focus their time and energy on making more money. Adding a part-time job or starting a side business will bring extra income into the household, income that can be used to make extra payments a mortgage.

Both new homebuyers and refinancers should be prepared to do lots of shopping around, not only to get as many free quotes and good faith estimates as possible, but also because many lenders are overwhelmed with applications right now and may turn away even the best borrowers. Borrowers who aren't confident with their deal-hunting or negotiating skills can seek help from mortgage professionals, but they should also consider buying highly recommended books on mortgages from their favorite online bookseller.

Futures Market 94% Certain Prime Rate Will Hold At 3.25% After The April 29 Fed Meeting

2009-03-27T21:57:00.001-04:00

The Dow Jones Industrial Average (DJIA) advanced by 497.80 points this week (6.839%) while the broader S&P 500 Index gained 47.40 points (6.168%.) It was the third straight week of gains for the two indices since stocks hit a bear-market low on March 6, 2009. For some perspective, here's our latest bear market update.

Since closing with record highs on October 9, 2007, the DJIA has now given up 6,388.35 points (45.101%), while the S&P 500 Index has declined by 749.21 points (47.868%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

For the year, the DJIA is down 1,000.21 points (11.397%), while the S&P 500 is down 87.31 points (9.666%).

In other economic news:

On Thursday, the Commerce Department released the final word on the gross domestic product (GDP) for Q4 2008: the U.S. economy shrank by an annualized rate of 6.3% during the last three months of last year.
On Friday, the Commerce Department reported that personal income declined by 0.2% during February, while consumer spending advanced by 0.2%.
On Monday, the National Association of Realtors® reported that prices on preowned homes improved, but inventories climbed higher. The median price on a used home rose from $164,800 for January to $165,400 for February, while the average price rose from $206,700 for January to $209,700 for February. Inventories -- the number of previously occupied homes for sale at the end of February -- jumped from 3,611,000 for January to 3,798,000 for February.

Click here for historical prices and a chart.
On Wednesday, the Commerce Department reported that the median price on a new (never-occupied) home fell from $206,800 during January to $200,900 during February.

Click here for historical prices and a chart.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 94% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the April 29^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the April 29^TH, 2009 FOMC monetary policy meeting is adjourned: 94% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Tips for Surviving A Recession

2009-03-25T23:11:00.002-04:00

Americans are worried about their finances, and they're angry with their government. The federal government is borrowing tens of billions of dollars to keep zombie banks and corporations alive, while at the same time offering limited help for individual Americans who have always been responsible with their finances. Regardless of what the government is doing, middle-class families, small business owners and everyone else who's feeling the pinch of this recession should do what they can to survive. Here are some recession survival tips:

Become An Indispensable Employee - Layoffs are happening everywhere; no sector of the economy is safe. A sound workplace strategy: become the employee that your company can't do without. You don't have to suck up to your boss, but there are things you can do to make yourself stand out in the crowd. Be the employee who shows up to work early and leaves late. Make a point of showing off to your boss just how productive you are. Every once in a while, make intelligent recommendations on how the company you work for can save money. When you see a conflict flare up, be the level-headed mediator who resolves the problem.
Get Rid of Your Debt - Don't get into the mindset that having credit card debt is OK. It's not OK. Even if you have only a few hundred dollars of credit card debt, and you're paying interest on that debt, then your finances need fixing. Cut back on extraneous expenses and pay your credit card debt down to zero as soon as you can.

If you have old credit card accounts that you don't use, keep these cards open. This will help to keep your FICO® credit score healthy. If you recently used an old credit card to make a small purchase so that your bank doesn't close the account, that's fine. But pay that balance down to zero right away. You will reap no benefit from paying down a credit card balance over time, large or small.
Stay Fit! - We all know that there are unnumbered benefits associated with physical and mental fitness. One of the most overlooked is the amount of money it can save. You can't prevent the medical bills associated with e.g. a car accident but, by staying in shape, eating right and not smoking, you can prevent maladies like cancer, type II diabetes, heart disease and hypertension. Medical bills can pile up extremely fast, and, if you're unfortunate enough to end up dealing with a protracted illness, you could end up losing your job as well.

Keep your brain healthy by eating foods that contain omega-3 fatty acids as often as possible. Sardines, salmon and fish oil pills are all good picks. If you want to have a great mind into your old age, exercise and cultivate your brain by learning new skills like a new language or new dance steps. When you're bored waiting in line somewhere, count backwards in your head. Start with the number 300, then subtract seven or nine (not an easy decrement like two or five), and keep going. A healthy, productive brain is the best tool you can have to build wealth in any economic climate.
Boost Your Rainy-Day Fund - Your goal should be to have enough cash in the bank to survive for a year if you lost your main source of income.
Invest In Gold and Peer-to-Peer (P2P) Lending - Right now, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index are off more than 45% from their October 9, 2007 peak. Bottom line: stocks aren't looking good right now. Moreover, since stocks have become unattractive to both institutional and individual investors, lots of Wall Street money has been moving to the safety of government securities, driving yields way down. Investing in gold makes perfect sense right now. The Fed and the Treasury department have been pumping vast quantities of cheap cash into the economy, which will cause inflation to flare up like an ulcer down the road. Investors will move their money to gold even faster than they are now, driving its price upward.

P2P lending is also a great investment option right now, if you can tolerate some risk. For example, at Lending Club, the average return is 9.05%. Where else can you help yourself with a high rate of return, while helping worthy borrowers who can't find loans elsewhere?
Sell Stuff on eBay and Craigslist - You know you have lots of stuff around the house that you could sell on eBay.com, so just sell it. Better yet, list your stuff on Craigslist.com for free. Whenever you pick up an item in your home and say to yourself, "Nah, that couldn't sell on eBay or Craigslist," snap a few photos of the item and list it. Just about anything can be sold online; this is especially true today as this recession has turned many consumers into serious bargain hunters.
Refinance Your Mortgage - Right now, the Federal Reserve and the Treasury Department are working together to keep mortgage rates as low as possible. The average refinance rate is expected to fall and remain below 5% for some time, which makes it a great time to get out of a high-rate mortgage. To get the best rate, make an effort to get your FICO credit score above 760 (720 is no longer considered top-tier.)

If you don't like what the government is doing with your tax dollars and money it's borrowing from other countries then contact your representatives in the House and Senate. But don't waste too much time and energy complaining. Every morning, remind yourself to focus your efforts on increasing your income and net worth. This recession has the potential of lasting two years or more, so even wealthy families are cutting back and preparing themselves for the worst. The key to surviving this economic downturn is to build and preserve wealth, but never overlook the importance of preserving your mental and physical health.

Investment Options for the Recession-Weary

2009-03-24T12:39:00.005-04:00

The media have been relentless in their discussion of the current state of the economy. Many Americans have been paying very close attention to economic news headlines, and they've been fretting about their declining investment portfolios. This painful recession has prompted many to take step that are tantamount to putting their hard-earned money in a coffee can and burying it in their backyard. Obviously, mattress-stuffing is a safe way to go, but that lazy cash will definitely lose value over time, its value eroded away by inflation. This economy has everyone worried about their investments, but there's no need to panic. There are still safe places to invest your dollars:

Gold - Since the global financial crisis began back in 2007, investors have been looking for safe places to grow their money. Institutional and individual investors have been buying gold, both the metal and stock in companies that mine and process gold. The price on gold will almost certainly increase into 2009 and probably into 2010 as well. The federal government has reacted to the triple threat of a) the real possibility of a deep and protracted recession b) financial market turmoil and c) the threat of deflation by dumping vast quantities of cheap cash into the American banking system, and all this cheap money will eventually make its way into the economy. When that happens, inflation will rear its ugly head, and investors will buy even more gold, as a hedge against rising prices.

Peer to Peer Lending Networks - Peer to Peer (P2P) Lending Networks like Lending Club have been gaining in popularity as individuals and businesses find it virtually impossible to secure financing from banks and other financial institutions. Currently, Lending Club offers investors returns in the range of 6.69% to 19.37% (the average return is 9.05%.) If you're interested in a short-term investment and you're willing to take on some risk, investing in P2P lending may be an option for you. Research the network you're planning to lend with. Find out the average loan default rate and carefully consider whether it's a system that you are comfortable with. Most lending networks allow you to provide micro-loans to borrowers, which you can use to get your feet wet.

High Yield Certificate of Deposit - A certificate of deposit (CD) is a type of deposit account that invariably offers a higher yield than a standard savings account. CD's are considered relatively safe and provide a decent return on your investment. Before investing in a CD, use your favorite search engines (don't rely on Google alone! Yahoo! has a great search engine too!) to research the financial institution you plan on using. If you find complaints about fraudulent activity or poor customer service or worse, then stay far away from that particular financial institution. The last thing you want is to have your money tied up in CD's provided by a fraudulent company like Stanford Financial.

Credit unions have weathered the financial storms of recent months well. If you can join one, it's a great idea to buy a CD with a credit union (a CD at a credit union is called a share certificate.)

Debt Reduction - Reducing your debt should at the top of your financial to-do list regardless of the state of the economy. Carrying an oppressive debt load during a recession can bring ruin to a once thriving household, and nobody wants to be forced into moving back with their parents. If you are looking for a safe and smart place to invest your money, consider investing in your financial future by reducing your debt. Every balance you reduce or pay off will increase your monthly cash flow, and that liberated cash can be used for investing.

Stocks - Experienced investors know that a recession can bring great opportunities to make fast money. With real estate and stock markets plummeting globally, the biggest losers are, generally speaking, small to mid-sized companies and fast moving consumer goods (FMCG) stocks. Companies that have had a substantial market share for more than 25 years are far more likely to survive this and future recessions. It's important to diversify your portfolio and sell stocks of companies that are unlikely to survive the current crisis. Look for strength and obvious opportunities. Companies that are sitting on huge piles of cash -- $10 billion dollars or more -- are strong. If a company's stock price is cheaper than that same company's earnings, then owning a piece of that company is probably a good idea.

U.S. Treasuries are also extremely safe. Even if everyone in the United States failed to pay their taxes, the federal government has the power to simply print more money to meet its fiscal obligations. In the current economic environment, however, Treasury bills, notes and bonds are in high demand, which in turn has caused their yields to drop dramatically. Bottom line: there's almost no point in investing in e.g. a 12-month Treasury bill when the yield is less than 1%.

It's always a good idea to have a strong cash position during an economic downturn, but overdoing it can seriously compromise your plans for a comfortable retirement. Investing during a recession can be tricky, but with knowledge and some courage, even the most cautious investor can invest with confidence and, most importantly, stay ahead of inflation.

Advice for Those Looking to Refinance Their Car Loan

2009-03-23T17:08:00.004-04:00

The economic downturn has many car owners looking for ways to lower their car payments. Since the third quarter of 2008, dramatic disruptions in the nation's banking sector have prompted most banks to scale back their lending programs, or stop making loans altogether. Despite serious problems in America's financial markets, car loan refinancing is still available, and it can help consumers lower their monthly auto loan payment to a more manageable level.

The following is a useful and timely auto loan refinance checklist:

Call your current lienholder, and ask how much it would cost to pay the entire loan off. Get your "payoff quote" in writing and make sure there's a specific expiration date for the quote.

Look over your current car loan carefully. Some lenders charge an early payment penalty, so read your agreement and make sure that you actually have the option to refinance.

If you're almost done paying your current loan, you might want to reconsider refinancing. In the United States, the typical car loan lasts 3 to 5 years. Trying to refinance within the last one or two years of the loan would make the payment period longer, and most likely add a few thousand dollars in interest and other charges to the cost of the vehicle.

Make sure your vehicle's information is accurate, so the lender can price the vehicle properly. If it is worth less than $8,000, you probably won't be able to refinance.

Check your credit, and make sure there are no errors on your report. Lenders will base your new interest rate on your credit history, score, and record of payments made.

Make sure your insurance is up to date. You won't be able to get the refinanced loan if your insurance coverage is called into question.

Make sure the original lien was paid. Your state's Department of Motor Vehicles should have a record of any and all liens on your vehicle. When the new loan is given, the first lienholder is supposed to give notice that their lien has been paid off.

When in doubt, consult a professional. Auto loan refinancing can have quite a few hidden costs, so make sure that it will really benefit you financially. Some lenders will offer a low, "teaser" interest rate, but then slap you with outrageous application fees. A professional can sit down with you and show you how to tell if you're getting a good deal.

Auto Refinancing Scams to Watch For:

Never pay for a vehicle appraisal. All cars decline in value over time, with very few exceptions. You don't want to have your loan application rejected because the loan amount is more than the vehicle is worth. Stay away from any lender who tells you that you have to pay for an appraisal, or any other kind of up-front fee. While there are fees involved in changing a car's title to show the new lienholder, the loan application and ensuing credit check should always be free. Be especially wary of any lender who claims they can give you more than the balance on your loan. Look over the loan paperwork very carefully, and never sign a blank contract.

If you have unfavorable terms with your current car loan, refinancing is most likely a good idea. If you're able to refinance, cool! But don't squander the opportunity to get ahead. Pay a little more than the minimum each month, but less than what you were paying before you refinanced. Doing so will get the loan paid off sooner, and it will build car equity faster.

Second FOMC Meeting of 2009 Adjourned: Prime Rate Holds at 3.25%

2009-03-18T15:02:00.006-04:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its second monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the U.S. or Fed Prime Rate) will remain at the current 3.25%.

Here's a clip from the FOMC press release:

"...Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen..."

Futures Market Near Certain Prime Rate Will Remain at 3.25% After Tomorrow's FOMC Meeting

2009-03-17T20:14:00.010-04:00

The Federal Open Market Committee (FOMC) decided to turn a one-day monetary policy meeting into a two-day meeting, so we'll have an announcement on short-term interest rates tomorrow afternoon. It's a pretty safe bet that the Fed will leave short-term rates, including the Prime Rate, exactly where they are. Only 3% in the fed funds futures market are betting that the Fed will opt to raise short-term rates by at least 25 basis points (0.25 percentage point) tomorrow.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 97% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at tomorrow's monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after tomorrow's FOMC monetary policy meeting is adjourned: 97% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The Unemployment Rate Is Now 8.1%; Futures Market Still Betting On No Rate Change for March 17

2009-03-06T20:52:00.050-05:00

Earlier today, the Labor Department reported that American, non-farm payrolls shrank by 651,000 last month, while the unemployment rate jumped from 7.6% to 8.1%. As of the end of February, there were 12,500,000 unemployed persons in the United States.

Yesterday, the Labor Department reported that there were 639,000 new claims for jobless benefits during the week that ended on February 28. During the week that ended on February 21, there were 5,106,000 people receiving an unemployment check.

Right now, the fed funds futures market is still 94% certain that the Federal Open Market Committee (FOMC) will leave short-term rates, including the U.S. Prime Rate, at current levels when the group adjourns its next monetary policy meeting on March 17^TH.

Other economic news which likely influenced futures traders this week:

On Tuesday, the Bank of Canada, Canada's central bank, lowered its benchmark interest rate from 1.0% to 0.5%, which in turn caused the country's Prime Rate to drop to 2.5%, a new record low.
On Thursday, the European Central Bank (ECB) lowered its benchmark interest rate from 2.0% to 1.50%. The Prime Rate in the eurozone is now the lowest it's been since the ECB was founded in 1998.
Also on Thursday, the Bank of England (BoE), the central bank for the United Kingdom, lowered its benchmark interest rate by 50 basis points (0.50 percentage point), from 1.0% to 0.50%. This is a record low for the BoE, which has been around since 1694.
Bear Market Update: since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now lost 7,537.59 points (53.215%), while the broader S&P 500 Index has given up 881.77 points (56.338%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

For the year, the DJIA is down 2,149.45 points (24.491%), while the S&P 500 is down 219.87 points (24.342%).
For a brief period during trading today, and for the first time ever, Citigroup (C) became a penny stock. Eventually, Big "C" advanced back up above the dollar mark and closed at $1.03 per share.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 94% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the March 17^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the March 17^TH, 2009 FOMC monetary policy meeting is adjourned: 94% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 94% Certain Prime Rate Will Hold At 3.25% After The March 17 Fed Meeting

2009-02-25T13:24:00.040-05:00

Yesterday, The Conference Board reported that its Consumer Confidence Index (CCI) dropped from a revised figure of 37.4 for January, to a brand new record low of 25.0 for February. Wall Street economists were expecting a figure of around 35.5 for this month.

For the CCI, the baseline "100" score is linked to 1985 survey data.

The National Association of Realtors® delivered more somber economic news earlier today. Sales of previously occupied homes declined by 5.3% last month. The total number of used homes for sale fell from 3.7 to 3.6 million during January, which is a good thing, but prices continued to slide. The median cost for a preowned home fell from $175,700 to $170,300, while the average price fell from $217,600 to $212,900. Click here for historical prices and a chart.

The Commerce Department will release its report on new home sales tomorrow.

Yesterday, the S&P/Case-Shiller Home Price Indices provided an update of how property values are doing in specific U.S. cities. Notable figures for the December 2007 through December 2008 period can be found below:

San Francisco: -31.2%
San Diego: -24.8%
Phoenix: -34.0%
Miami: -28.8%
Los Angeles: -26.4%
Las Vegas: -33.0%
Detroit: -21.7%
National Index: -18.2%

And how are American banks doing? Right now, you can buy Citigroup (C) at $2.62 per share. A year ago, Big "C" was trading at $23.66.

Bank of America (BAC) can be purchased for $4.83 per share. Twelve months ago, BofA stock was trading at $39.70.

Bank failures are occurring at an alarming rate. So far, eight banks have failed during February, and 14 American banks have closed since the beginning of the year.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 94% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the March 17^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the March 17^TH, 2009 FOMC monetary policy meeting adjourns: 94% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 90% Certain Prime Rate Will Hold At 3.25% After The March 17 Fed Meeting

2009-02-06T18:49:00.051-05:00

Yesterday, the Labor Department reported that as of the week that ended on January 24, there were 4,788,000 Americans continuing to rely on unemployment benefits, which is a record-high. During the week that ended on January 31, there were 626,000 new claims for jobless benefits.

Earlier today, the Department of Labor delivered more somber news. During January, the unemployment rate jumped from 7.2% to 7.6%, and American nonfarm payrolls shrank by 598,000. Nonfarm payrolls have declined by 3.6 million since December 2007 (that's when this recession officially began.)

Right now, the fed funds futures market has odds at 10% that the Fed will opt to raise short-term rates, including the U.S. Prime Rate, by at least 25 basis points (0.25 percentage point) at the March 17^TH Federal Open Market Committee (FOMC) monetary policy meeting. The remaining 90% of the market is betting that the fed will keep short-term rates at current levels after next month's meeting.

In all likelihood, the following economic news (including the above) had at least some influence on the fed funds futures market recently:

On Thursday, the Bank of England, which serves as the central bank for the United Kingdom, cut its benchmark interest rate by 50 basis points (0.50 percentage point) to 1.00%. This is an all-time, record low for the UK central bank, which was founded in 1694 to fund the war against Louis XIV's France.
On Monday, the Commerce Department reported that consumer spending declined by 1.0% during December 2008, while personal income waned by 0.2%.
Also from Monday, the Institute for Supply Management (ISM) reported that its Purchasing Manager's Index (PMI) was 35.6% during January. This was an improvement over the December figure of 32.9%, but still a strong indication that the U.S. manufacturing sector is in decline.

For the PMI, any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction for a particular month.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 90% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the March 17^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the March 17^TH, 2009 FOMC monetary policy meeting adjourns: 90% (likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

First FOMC Meeting of 2009 Adjourned: The Prime Rate Remains at 3.25%

2009-01-28T14:32:00.011-05:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its first monetary policy meeting of 2009 and, in accordance with our most recent forecast, has voted to leave short-term interest rates at their current levels. Therefore, the benchmark target range for the federal funds rate will remain at 0% - 0.25%, and the Wall Street Journal® Prime Rate (also known as the Fed or U.S. Prime Rate) will remain at the current 3.25%.

Here's a clip from the press release that has just been issued by the FOMC:

"...The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs..."

Prime Will Remain At 3.25% After The FOMC Adjourns Its Monetary Policy Meeting Tomorrow

2009-01-27T17:02:00.063-05:00

The fed funds futures market is now a bit less confident that the Fed will vote to leave short-term rates (including the U.S. Prime Rate) at their current levels tomorrow, but it's still a very safe bet that the Fed will leave short-term rates alone. Right now, the futures market has odds at 97% that the Federal Open Market Committee (FOMC) will vote to do nothing with short-term rates. 3% in the market are betting that the Fed will raise rates by at least 25 basis points (0.25 percentage point) tomorrow.

The futures market had plenty of economic news to digest over the past two weeks, and one of the most significant items was released today. [Drum Roll] We now have a new record low value for consumer confidence. Earlier today, The Conference Board reported that for January (this month) the Consumer Confidence Index (CCI) fell to 37.7, while last month's figure was revised down to 38.6. Wall Street was expecting a figure of around 39.0 for the current month. Bottom line: American consumer spending, a major driving force in the global economy, probably isn't going to pick up any time soon.

For the CCI, the baseline "100" score is pegged to 1985 survey data.

In all likelihood, the following recent economic news (including the above) had at least some influence on the fed funds futures market recently:

A first for Microsoft: the company announced recently that up to 5,000 employees will receive pink slips over the next year and a half. Other major companies announcing layoffs recently: Home Depot, Caterpillar, Sprint Nextel, General Motors, Texas Instruments and Pfizer/Wyeth (pharmaceutical behemoth Pfizer is buying its rival Wyeth in a deal worth $68 billion.)
On January 16, The Labor Department reported that consumer prices waned by 0.7% during December 2008. Consumer inflation advanced by a mere 0.1% from 12/07 through 12/08.

The current disinflationary environment (sustained by a protracted recession, rising unemployment, low consumer confidence and consumer spending, continued home price depreciation, etc.) could blossom into full-blown deflation. Deflation is anathema to Fed economists, and rightfully so: watch how the unemployment rate skyrockets if deflation takes hold.
Though there was a month-over-month advance for sales of previously occupied homes during December 2008 (+6.5%), prices continued on a downward trend. According to yesterday's report from the National Association of Realtors®, the median price of a preowned home fell to $175,400 last month, while the average price fell to $216,000. Both the median and average cost of a used home have declined each month since June 2008. Click here for historical prices and a chart.

2009 has barely had a chance to crawl out of bed, yet three banks have already failed since the start of this year. Twenty-five banks failed during 2008. For some perspective, 3 banks failed during all of 2007 and there were no bank failures during both 2005 and 2006.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 97% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 28^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the January 28^TH, 2009 FOMC monetary policy meeting adjourns: 97% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 100% Certain Prime Rate Will Hold At 3.25% After The January 28 Fed Meeting

2009-01-08T12:09:00.073-05:00

The fed funds futures market is now 100% certain that the Federal Open Market Committee (FOMC) will vote to leave short-term rates, including the U.S. Prime Rate, at their current levels at the January 28^TH, 2009 monetary policy meeting.

The futures market -- and all of America for that matter -- was expecting a dismal jobs report this morning, and the Labor Department did not disappoint. According to this morning's employment situation report for December, American, nonfarm businesses shed 524,000 jobs last month, and the unemployment rate jumped from the revised November figure of 6.8% to 7.2% for December. The decline in nonfarm payrolls during November, which was originally reported at 533,000, was revised up to 584,000. During December, the total number of jobless Americans rose by 632,000 to 11.1 million.

In all likelihood, the following recent economic news (including the above) had at least some influence on the fed funds futures market this week:

How does the Fed feel about the employment outlook? For some insight, here's a clip from the minutes of the December 16, 2008 FOMC monetary policy meeting, which was issued last Tuesday:

"...All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010..."
Also from Tuesday, aluminum giant Alcoa announced that, by the end of 2009, it will issue pink slips to 13,500 employees (13% of its workforce) and will also cut 1,700 contractor jobs. Recently, companies representing a broad cross section of sectors announced plans to cut jobs, including the Bank of America, Boeing, GE Aviation, Schlumberger, Dupont, Walgreens, EMC Corporation and others.
Another item from Tuesday: The U.S. Census Bureau, which is part of the Commerce Department, reported that factory orders declined by 4.6% during November 2008. Wall Street economists were expecting a decrease of around 2.5%.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 28^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the January 28^TH, 2009 FOMC monetary policy meeting adjourns: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

Futures Market 97% Certain Prime Rate Will Hold At 3.25% After The January 28 Fed Meeting

2008-12-31T21:27:00.088-05:00

On December 16, the Fed took the unusual and unprecedented step of setting a target range of 0% - 0.25% for the benchmark fed funds rate. With regard to short-term interest rates, the Federal Open Market Committee (FOMC) has virtually no place left to go but up. However, with the threat of deflation still looming over an economy in dire need of stimulus, the Fed will very likely opt to keep America's cardinal interest rate exactly where it is. The futures market currently has odds at 3% that the Fed will opt to raise its benchmark rate by at least 25 basis points (0.25 percentage point) on January 28, with 97% in the market betting that the Fed will vote to leave short-term rates alone.

In all likelihood, the following recent economic news had at least some influence on the fed funds futures market this week:

According to the S&P/Case-Shiller Home Price indices released yesterday, home values took a significant turn for the worse at the start of the fourth quarter. Here are some notable price decline percentages in major U.S. cities for the October 2007 - October 2008 period:
- San Francisco: -31.0%
- San Diego: -26.7%
- Phoenix: -32.7%
- Miami: -29.0%
- Los Angeles: -27.9%
- Las Vegas: -31.7%
- Detroit: -20.4%
Also from yesterday, the Fed announced that at some point in early January it will start buying up mortgage-backed securities; you know, the ones now infamous for a) setting off the global financial crisis, b) contributing much to the development of the current recession and c) taking down some of America's most influential financial institutions.
Again from yesterday, The Conference Board announced that its Consumer Confidence Index (CCI) declined to 38.0 for this month (December), which is a new, all-time low for this metric. Wall Street economists were expecting a reading of about 45.0. Clearly, this is not a good omen for consumer spending, which was the principal driving force behind the last economic expansion in the USA, the expansion which, technically speaking, ended exactly one year ago.

The October, 2008 CCI figure was originally reported at 38.0 as well, but it was later revised up to 38.8. For some perspective: October was the month during which the current, global credit crisis peaked.

For the CCI, the baseline "100" score is associated with 1985 survey data.
Crude oil for future delivery finished 2008 at $44.60 per barrel in New York. That's a decline of $100.69 (69.303%) since crude closed at $145.29 per barrel on July 4, 2008.
Bear Market Update: since closing with record highs on October 9, 2007, the Dow Jones Industrial Average (DJIA) has now declined by 5,388.14 points (38.04%), while the broader S&P 500 Index has shed 661.90 points (42.29%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

For the year, the DJIA lost 4,488.43 points (33.837%), its worst yearly retreat since 1931. The S&P 500 has given up 565.11 points (38.486%.)
One more item from yesterday: the Fed reported the results of its latest, $150 billion money auction, also known as the Term Auction Facility. There were 72 bidders this time around. These 83-day loans will mature on March 26, 2009 and will have an interest rate of 0.2% associated with them.
The yield on the benchmark 10-Year Treasury Note ended the year at 2.244%, while the yield on the 13-week Treasury Bill finished 2008 at 0.115%.

If you've been waiting for the Prime Rate to bottom out, it's very likely your wait is over. The one- and three-month LIBOR rates, on the other hand, will likely shed a few more basis points (over time) before settling near the Fed's current upper limit for the fed funds target rate (0.25%.) Stay tuned to this chart for some perspective on how key benchmark rates are trending.

Of course, the LIBOR rates are constantly changing. Stay tuned to this blog for the latest LIBOR news.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 97% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the January 28^TH, 2009 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will remain at the current 3.25% after the January 28^TH, 2009 FOMC monetary policy meeting adjourns: 97% (very likely)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

U.S. Prime Rate Is Now 3.25%

2008-12-16T15:24:00.032-05:00

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its eighth and final scheduled monetary policy meeting of 2008. Earlier today, the FOMC decided to take the unusual step of establishing a target range for the Federal Funds Rate of 0% - 0.25% (as opposed to using a simple target for the fed funds rate, which heretofore was the FOMC's usual way of setting its most powerful monetary policy tool.) Our bank survey is now complete: American banks have responded to today's action by the Fed by lowering their prime lending rate from 4.00% to 3.25%. Therefore, the U.S. Prime Rate is now 3.25%.

Here's a clip from a press release issued by the FOMC moments ago:

"...The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent..."

A number of large, American banks have already issued a press release announcing that their prime lending rate has been lowered from 4.00 to 3.25%, including:

Futures Market 70% Certain Fed Will Cut Short-Term Rates by 75 Basis Points Tomorrow

2008-12-15T23:36:00.066-05:00

The fed funds futures market is now 70% certain the Fed will cut the benchmark fed funds target rate (FFTR) by 75 basis points (0.75 percentage point) tomorrow, which basically translates to more likely than unlikely. However, this website's official forecast is the same as it was on December 5^TH: the Fed will cut the FFTR by at least 50 basis points at the December 16^TH Federal Open Market Committee (FOMC) monetary policy meeting.

Yes, it's a very safe bet that the Fed will cut its most important interest rate tomorrow. But will American banks respond by cutting their prime lending rate as usual?

Since the second quarter of 1994, American banks have pegged their prime lending rate to the FFTR. Since that time, a reliable formula for the United States Prime Rate has been:

U.S. Prime Rate = (the FFTR + 3)

On June 27, 2003, the Fed lowered the FFTR from 1.25% to 1.00%. American banks responded by lowering their prime lending rate from 4.25% to 4.00%, but some banks did so grudgingly, complaining that a 4% Prime Rate was too low for them to make a decent profit.

Tomorrow, the Fed will probably lower the FFTR from 1.00% to 0.50%, and if all goes well, American banks will respond by lowering their prime lending rate from 4.00% to 3.50%. But some large banks may resist the rate cut, opting instead to cut their Prime by 0.25 percentage point instead of 0.50, or by not cutting at all and leaving their Prime at 4.00%. This outcome is a very real possibility, as this happened just last week in Canada, the 9^TH largest economy in the world.

It's also important to note that if your bank cuts it's Prime Rate tomorrow, you may not see any change in e.g. the rate you pay on your credit card that's indexed to Prime. Many banks include an interest rate floor in credit card terms to protect themselves from deep rate cuts by the Fed. Bottom line: your credit card account may already be at your card's lowest possible interest rate as a result of the numerous rate cuts the Fed has made since September 2007. Here is an example from an Advanta business credit card agreement:

"...Your Variable Account Rate Index for any billing cycle will be chosen by us from among the Prime Rates published in The Wall Street Journal's "Money Rates" section during the three (3) months prior to the month which contains that cycle's Billing Cycle Closing Date, but will not be less than 5.00%..."

So with this particular business credit card, any U.S. Prime Rate below 5.00% is meaningless.

The good news is that some major banks like U.S. Bank, American Express and the Bank of America don't use interest rate floors with their credit cards (so far.)

Stay tuned to this blog tomorrow. We will conduct our survey, as usual, and we'll update the site as soon as we have confirmation of a rate cut by 23 of America's 30 largest bank holding companies (BHC's.) If some big banks balk, we'll let you know about that too. And please be patient, as confirmation may come very late in the day. Banks will likely be watching each other to see who moves first and by how much.

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at the December 16^TH, 2008 monetary policy meeting.

Summary of the Latest Prime Rate Forecast:

Current odds that the Prime Rate will be cut by at least 50 basis points at the December 16^TH, 2008 FOMC monetary policy meeting: 100% (certain)
NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)