- The Washington Times - Friday, August 21, 2009

The Federal Reserve Board met last week. Most analysts appeared to interpret the text of the Fed’s statement as a vote of confidence that the economy was on its way to recovery. After reading the statement, I thought it was a bit wishy-washy. Consider the following excerpts:

“[E]conomic activity is leveling out. Conditions in financial markets have improved further in recent weeks.”

This sounds to me like the Fed is letting us know that the worst of the recession is behind us.

“Household spending … remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.”

In this sentence, the Fed is telling us that the recession is nowhere near over.

“The Committee will maintain the target range for the federal funds rate at 0 to 0.25 percent … for an extended period.”

The federal funds rate is the rate that banks charge each other for overnight funds. The Fed is telling us that by keeping this rate at between 0 to 0.25 percent for an extended period, it is still very worried about sluggish economic growth.

“[T]he Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities … by the end of the year.”

This means the Fed will continue to ramp up the demand for mortgages, which is intended to keep mortgage rates low. So far, these efforts have been only moderately successful.

“[T]he Committee … anticipates that the full amount [$300 billion in Treasury securities] will be purchased by the end of October.”

The Fed is telling us that it will cease creating demand for long-term Treasury notes. This would normally cause interest rates, including mortgage rates, to rise.

I can’t tell what the Fed is thinking. My guess is that the Fed doesn’t know either.

Meanwhile, I continue to refinance only a few eligible borrowers to lower interest rates. Thanks to the government’s overtightening of lending rules, thousands of creditworthy borrowers who could benefit from a refinance cannot do so.

To receive the lowest rates available, a borrower must have a credit score of 740 or higher in many cases. A borrower with a 680 score - what was once considered a perfectly acceptable score - will be offered a rate that is too high to receive a benefit.

On top of that, the new appraisal rules are killing values and refinance opportunities for those whose credit scores are acceptable.

It’s a curious situation. The government is hemorrhaging money to revive the economy and get credit flowing again. At the same time, it has tightened the rules at the consumer level to the point where nobody can be helped. It’s akin to digging a hole and filling it back up again.

Politicians and financial gurus, please feel free to comment.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.

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