A Simple Explanation Of The Federal Reserve Statement (August 10, 2010 Edition)

Today, in its first meeting in 6 weeks, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged. 

The Fed Fund Rate remains at a historical low, within a prescribed target range of 0.000-0.250 percent.

In its press release, the FOMC said that, since June, the pace of economic recovery "has slowed". Household spending is increasing but remains restrained because of high levels of unemployment, falling home values, and restrictive credit.

Today's statement shows less economic optimism as compared to the prior year's worth of FOMC statements dating back to June 2009. The Fed is looking for growth to be "more modest in the near-term" than its previous expectations.

Weaknesses aside, the Fed highlighted strengths in the economy, too:

1. Growth is ongoing on a national level
2. Inflation levels remain exceedingly low
3. Business spending is rising

As expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent "for an extended period".

There were no surprises in the Fed's statement so, as a result, the mortgage market's reaction to the release has been neutral. Mortgage rates in New York are unchanged this afternoon.

The FOMC's next meeting is scheduled for September 21, 2010.

1 In 8 Banks Tightened Prime Mortgage Standards Last Quarter

The Federal Reserve says that financial markets "remain supportive of economic growth". Residential mortgage guidelines, however, continue to tighten.

If you've applied for a home loan recently, you probably felt it; extra scrutiny on income, assets and credit scores, among other things.  The hard proof of the changes, however, can be found in the Federal Reserve's quarterly survey of its member banks.

Every 3 months, the Federal Reserve asks senior bank loan officers around the country whether their respective banks' "prime" residential mortgage guidelines tightened since the last survey.

For the period January-March 2010, 1 in 8 banks surveyed toughened their qualification standards. 

Only 4% loosened them.

When we account for the Fed's survey in conjunction with new underwriting standards from Fannie Mae and FHA, it's clear that getting approved for a mortgage in 2010 is more difficult than at any time in recent memory.

Today's homeowners and home buyers have taller hurdles to leap:

• Minimum FICO scores are higher
• Downpayment/equity requirements are larger
• Debt-to-Income thresholds are smaller

In other words, mortgage rates may stay low throughout 2010, but that won't matter to homeowners failing to meet the new, minimum eligibility standards as set forth by the lenders.

If you're among the many people wondering if now is the right time to buy or refinance a home, remember that -- along with a probable increase in mortgage rates -- mortgage approvals are getting more scarce.

The best home price or mortgage rate in the world won't matter if you're ineligible for financing.