Fed Chops Rates, But Housing Won’t Benefit
The Federal Reserve Board chopped rates a whopping .75% yesterday. In a widely expected move, short term interest rates now sit at 2.25%. The discount rate, a previously rarely used credit facility allowing direct borrowing from the Fed, was cut to 2.5%. Wall Street responded positively with the Dow sharply up 420 points.
Yet this cheaper money will probably not benefit housing. Why? On the same day the Fed was cutting, a major investor was tightening FHA standards. I found out Chase has eliminated FHA loans below 580 and tacked on a hefty 3% hit to price for those with credit scores of 580-599. A 2.5% hit to price is being tacked on to the newly created Jumbo FHA loans.
While these price ads and credit tightening are not across the board FHA policies, the fact a big mortgage
investor is making these changes suggests other investors will soon follow. I thought the increased loan limits wouldn’t affect the price of FHA loans like it did with conforming, but I was wrong. Some of these additional costs will be mitigated through seller concessions, but many marginal buyers will simply put off the purchase because of the costs.
This action also sends a message that maintaining good credit is crucial to getting into a loan. Those people considering walking away from a home better understand the full costs in accepting a lower credit score.