Stag-deflation threatens, Fedâ€™s zero percent rate beckons homeownersJosephine NicholasCMPS, stag-deflation, Federal Reserve, LIBOR, prime rate, Term Asset-Backed Securities Loan Facility
"Stag-deflation is probably the single largest outside threat to
homeowners and consumers today," said Gibran Nicholas, chairman of
the CMPS Institute, an organization that certifies mortgage bankers
and brokers. "A stagnating economy erodes jobs, income and spending
power, while deflating home and investment values erode wealth and
make debt burdens even heavier. This toxic mix of deflation and
economic stagnation is known as stag-deflation."
Stag-deflation is the reason why the Federal Reserve lowered
their target interest rate this week to a range of zero percent to
0.25 percent. The thinking goes that lower interest rates give
banks, businesses, homeowners, and consumers smaller debt payments
and more spending power to help make up for the decline in their
incomes and asset values.
"The zero percent Fed Funds rate has a direct impact on the
LIBOR and prime rates," Nicholas said. LIBOR is the base rate that
is used on most adjustable rate mortgages in the US as well as
large corporate and commercial loans. Prime is the base rate that
is used on most home equity lines of credit and small business
The one month LIBOR has dropped to below one percent. "This
means that a homeowner with an adjustable rate LIBOR mortgage could
potentially see their rate go down to the 2.5 percent to four
percent range," Nicholas said. "The Prime has dropped to 3.25
percent, meaning that rates on many home equity lines of credit and
small business loans have dropped to the 3.25 percent to 5.25
percent range. Although fixed rate mortgages are not affected at
all by the Fed's zero percent interest rate, interest rates on
fixed mortgages have dropped significantly in recent weeks due to
the Fed's recent announcement that they will purchase over $600
billion of mortgage-backed bonds from Fannie Mae, Freddie Mac and
The Feds moves will mostly be felt by those with existing loans
and those who have the financial strength to qualify for new loans.
"This is the silver lining out there for all those creditworthy
borrowers who were wondering 'what's in it for me' when it comes to
all this government intervention in the markets," Nicholas said.
"What a perfect opportunity for homeowners, investors or business
owners to borrow at very low rates and invest the funds back into
their business or otherwise make a profit. Additionally, homeowners
who are in the 'jumbo' loan category may consider choosing an
adjustable rate tied to LIBOR or a home equity line of credit tied
to Prime as an alternative to many of the high jumbo mortgage rates
that are out there."
The main problem that has not yet successfully been addressed by
the Fed is the fact that many consumers and small businesses may
not qualify for the low rates as banks have tightened their lending
guidelines due to the recession and credit crisis.
"We expect to see a bit of a thawing process in lending
guidelines throughout 2009, Nicholas said. This is when the Feds
Term Asset-Backed Securities Loan Facility (also known as TALF)
will go into effect along with a few other programs. In the
meantime, those who do qualify for the low rates should act now
before either their situation or market conditions change."
Josephine Nicholas is executive vice president of the CMPS
Institute. For more information, visit www.CMPSInstitute.org or
call (888) 608-9800.