The scale of the mortgage industry crisis is BIG and will be felt throughout the economy. As a result, the Fed is monitoring the situation carefully and has already taken steps to manage the impact.
Here is a quick lesson on how the Fed does its job: The
Federal Reserve Bank (the Fed) coordinates the borrowing and lending activities
of federally chartered banks. The principal reason the Federal Reserve was
created was to reduce severe financial crises. One way to accomplish this goal
is to control the amount of money that flows through the economy. By
manipulating the
US
money supply, the Fed influences inflation, unemployment, and the level of
US
economic activity. The Fed has an assortment of tools that it uses to control the money supply, but its primary scheme is the management of short-term interest rates.
The Federal Reserve can modify two distinct short-term
interest rates. The discount rate is the interest rate which banks pay the Fed
for primarily overnight loans. Despite its name, the Fed Funds rate is the rate
banks pay to borrow from other banks. While the Federal Reserve has direct
control over the level of short-term interest rates, the Feds influence over
longer-term interest rates is less certain. Mortgage interest rates fall
into the latter group.
The Fed recently purchased $38 billion of mortgage bonds to advance liquidity in the mortgage industry, and they lowered the discount rate from 6.25% to 5.75%. Despite these steps, liquidity problems remain, and it is unknown how long it will take for the financial markets to recover.
During this time we advise you do not take equity out of
your home through refinancing or add/use a Home Equity Line of Credit. Let the
market shake out and when there is a clearer picture make conservative changes.
