The Federal Reserve's Reply

Did you know that you could e-mail the Federal Reserve?

I didn't until I decided to e-mail them about the lack of mortgages the banks are lending with the the lowest interest rate money they are receiving.

Here is my e-mail with the reply from the Feds following:

It is my understanding that the major reason for lending money to banks at a lower rate is to help the housing markets by providing more money for loans. That hasn't happened, they're taking that cash and using it to shore up their books. So it appears that the banks have/are reneging on the deal!

It would seem if the major reason money was being lend was to fund mortgages then shouldn't banks be doing that??! My question is; When lending money to the banks at a lower rate for a specific purpose, do you require that the banks prove that a high percentage of that money did go for that intended purpose? If not why not?

There ARE qualified people that would like to buy a home but can't find funding because the banks have made it impossible. This is the second year my house has been on the market as I watch homes prices plummet. I have had people who wanted to buy but could not get financing or wanted to buy but could not sell their home for the same reason.

Thank You,


Mortgage applications fell 15.3% led by a 25.7% decline in refinancing, which fell to the lowest since Aug 2006. Purchases fell 5.4% to its lowest level since February 2003. The rise in mortgage rates was the main catalyst as the average rate on a 30-year-fixed mortgage rose to 6.17% from 5.96% last week.



Dear Ms. _________:

Thank you for your inquiry regarding the effect of a lower federal funds rate on other interest rates.

By targeting the federal funds rate, the Federal Open Market Committee (FOMC) seeks to provide the monetary stimulus required to foster a healthy economy. A lower federal funds rate increases the amount of money and credit banks have on hand and ultimately affects other interest rates and the performance of the economy.

It is important to recognize that the rates that actually prevail are determined by a number of forces, and not by Federal Reserve actions alone. The Federal Reserve has considerable influence over some short-term interest rates, such as the so-called "fed funds" rate. But the Federal Reserve has less control over other short-term rates, and long-term rates often do not respond at all to Federal Reserve's actions or respond with considerable lag.

Mortgage rates also are affected by the economic factors that affect most other long- term rates. Mortgage rates, however, sometimes rise or fall more than other long-term rates because of the additional investment risks to lenders who make mortgage loans.

For example, a portion of the additional cost of mortgage credit compensates lenders for the risk of default, while another portion compensates lenders for the option that homeowners have to refinance their mortgages when interest rates decline.

I hope this information is helpful.

Sincerely,

JPD
Board Staff


So basically the answer to my question is NO. Banks are not required to show that they actually lending money for mortgages which was one of the supposed reason they gave for lowering the rate.

Hmmmmmmmmmm