Fed move helps homeowners but problems remain

By Lynn Adler - Analysis

NEW YORK (Reuters) - Borrowers applied for home mortgages in droves on Thursday, a day after the Federal Reserve pledged to buy up more than $1 trillion in bonds, but even historically low interest rates cannot cure the U.S. housing slump.

The Fed's stunning move helped to slash 30-year mortgage rates to near 4-3/4 percent from over 5-1/4 percent early Wednesday and from 6.0 percent just four months ago, spawning a race by home owners to cut their monthly home loan payments.

But with unemployment at a 25-year high, a record stockpile of unsold homes, and rigid lending standards still in place, a lasting housing recovery remains a long way off, industry experts said.

"It's been insane today. A lot of borrowers locking in between 4 1/2 and 4 7/8 percent, primarily refinancings," said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York. "This is what we've all be waiting for."

Some sizable barriers temper this optimism, though.

"Until you have all those foreclosures out of the system, I don't think you're going to see the housing turnaround happen," Moulton said. "It's a big backlog. This will help, but we still have a ways to go."

One in every 440 U.S. households with loans got at least one foreclosure filing in February, up 30 percent from a year earlier, despite various state and corporate moratoriums, according to RealtyTrac.

American home prices have toppled more than 26 percent since their peak nearly three years ago, according to Standard & Poor's/Case-Shiller indexes.

With that in mind, the Fed on Wednesday more than doubled its commitment to buy mortgage-related bonds to $1.25 trillion and said it would buy Treasuries for the first time in more than 40 years.

These massive efforts to cut borrowing costs come just a month after President Barack Obama's $275 billion housing stimulus, which aims to ease loan modifications and refinancing to quell the record foreclosures.

Nonetheless, "I doubt it's the panacea," said Jonathan Corr, chief strategy officer at Pleasanton, California-based mortgage software provider Ellie Mae.

"There's opportunity right now with rates coming down," Corr said, but the demand itself could muddy access to low-cost funds. "Don't sit on the sidelines, get in there and try to get something now. Because as demand increases and more people go in, the capacity will be restricted potentially and that may mean that costs start going back up again."

Banks are understaffed after mergers and layoffs. Backlogs will grow quickly, dragging the process out and potentially keeping lenders from cutting rates more deeply.

Others agree that the initial bond rally that swept mortgage rates down this week is a boon that could be short-lived.

"The scope and scale of this problem is so huge and this is clearly a sign of the administration willing to pull out all the stops," said Marietta Rodriguez, director of national home ownership programs at NeighborWorks America, in Washington.

"The other battle that the administration is facing right now is rising unemployment rates," she noted. "You obviously need a multi-pronged strategy, but there is a bit of a timing issue in trying to stop the hemorrhage because of unemployment."