Question Details

CJ, Home Buyer in 97301

What is the relationship between the subprime market problems and interest rates?

Asked by CJ, 97301 Mon Dec 3, 2007

If the subprime market is making the general housing market stop its climb and people are hesitant to buy--why do people predict interest rates to lower? Don't banks and mortgage holders need the interest rate to be higher to accommodate a lagging market? (I know I am confused about this--a little help:-)

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This is a timely question and I gave you a thumbs up for relevance! The short answer is that lower interest rates will help both the consumer and the bank side of the subprime market.
One of the biggest concern about subprime loans is the upcoming reset of interest rates on adjustable rate subprime loans. A lower interest rate would lower somewhat the new consumer interest rate from where it would otherwise reset. This would help but not solve the problem. Generally, these rates are going up anyway but will go up less with a rate cut.
Lower rates would help to reduce the number of foreclosures. This would help banks, as well as consumers, because banks generally lose money, lots of money, on foreclosures.
Many people think that banks make more money when interest rates are high but historically, that is not true. Higher interest rates raise banks' cost of funds and reduce volume of certain loan products, such as mortgages. Lower interest rates should increase banks'profitability. (One caveat: the correlation of lower interest rates to profitablity has weakened over time as bank products have diversifed away from pure vanilla loan and deposit products, and also into intl markets.)
Lower interest rates mean that more consumers would qualify for mortgages and help to shore up a bit the sagging real estate market.
Also, just to clarify; Banks don't set mortgage rates wherever they want to set them - the market dictates mortgage rates and banks respond by setting their rates within market parameters. The Federal Reserve also does not set mortgage rates but does have significant influence on rates overall. The Fed sets the short term borrowing rate for banks and considers a lot of different economic factrors in doing so.
I hope this clarifies a somewhat complicated subject a bit. I know some of the Realtors follow economic data very closely (I don't anymore) and if they want to post some good consumer links, we would find it very helpful.
1 vote Thank Flag Link Mon Dec 3, 2007
Great question Cmlj, There are so many factors! CPI, I think ,has the biggest affect. Staving off inflation has been a real concern usually. Lenders make money on most any loan product they offer (maybe all).

This link will support my opinion.

http://www.michaelrobertshomes.com/blogs/michael_roberts/arc…

Michael
http://www.MichaelRobertsHomes.com
1 vote Thank Flag Link Mon Dec 3, 2007
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