Fed Cut Unlikely To Prevent Mortgage Defaults
The Age
Thursday September 20, 2007
THERE was something for just about everyone in the Federal Reserve's decision to cut its benchmark interest rate by half a percentage point.
For some home owners, it could lead to lower mortgage rates in the months to come. For investors, it could help stabilise and bolster volatile share prices. For Wall Street financiers and for companies across America, it could eventually make borrowing easier and cheaper. "This is a bold move," said James Swanson, chief investment strategist at MFS Investment Management, a mutual fund company in Boston. "It's going to alleviate concerns that the credit market will kill the economy." But, while the news was welcomed by many, the reaction was not universally upbeat. Economists and market specialists cautioned that the cut would take time to work through the system. It could stoke inflation and send the dollar tumbling, especially if it is followed by another cut in the coming months. And the move may do little to help families who are confronted with rising mortgage payments, falling home prices and a weaker job market. Furthermore, unexpected problems could yet emerge in the complex investments that were popular with banks and hedge funds. The rate cut, to 4.75 per cent, was twice as large as most investors had expected, and it showed in the market's reaction. Standard & Poor's 500 Stock Index rose 2.92 per cent, to 1519.78, and the Dow Jones Industrial Average rose 335.97 points, or 2.51 per cent, to 13,739.39. It was the biggest single-day gain for both indices since early 2003. Many commercial banks followed the Fed and cut the prime rate they charge their best customers for loans. In the commodity markets, gold and oil prices both surged late in the day and the US dollar fell to a new low against the euro. Investors in the futures market are now betting that the Fed will cut rates at least once more this year, to 4.5 per cent, at the meeting late next month. But the central bank was more guarded. Noting that some inflation risks remained, the Fed said that its actions would have to balance concerns about slowing growth against the threat of inflation. Separate reports, though, indicate that as many as half the 450,000 subprime borrowers whose mortgage payments will increase in the next three months may lose their homes because they can't sell, refinance or qualify for help from the US Government."Short of the cavalry riding in over the hill, a lot of these people are just stuck," said Christopher Cagan, director of research and analytics at Santa Ana, California-based First American CoreLogic, the risk management unit of the biggest US title insurer.The number of borrowers whose mortgage payments jump in the next three months will be the second-highest for a quarter, according to Credit Suisse Group. Twenty-seven per cent have already missed a payment, said First American LoanPerformance, which owns the largest database of US mortgages. That makes them ineligible for the Federal Housing Administration bail-out proposed last month by President George Bush.There's no lifeline in sight for subprime borrowers, who face an average increase of 26 per cent, or $400 a month, according to CoreLogic.Falling prices and a rising inventory of unsold houses make it difficult or impossible to sell or refinance without losing money and government programs aren't designed to aid the most desperate. That leaves foreclosure as the only alternative, and one that will deepen and prolong the worst housing downturn in at least 16 years. -- With BLOOMBERG.
© 2007 The Age