WASHINGTON For Main Street, interest rate cuts and a plan by the White House and Congress to pump $150 billion into the economy are unlikely to keep many Americans from losing their dream of homeownership to foreclosure.
Wall Street was quick to applaud an unusually aggressive interest rate cut from the Federal Reserve on Tuesday, which came as President George W. Bush and lawmakers scrambled to assemble a package of tax rebates and other measures intended to stave off a recession.
But industry experts say these steps won't necessarily translate into lower mortgage costs for some 2 million Americans with risky subprime home loans with rates that are scheduled to adjust sharply higher over the next year.
For those who qualify for traditional 30-year fixed-rate mortgages, lower rates are now available thanks to recent Fed interest rate cuts. But many subprime borrowers have mortgages larger than what their properties are worth, and experts don't see home values rising any time soon.
"Home prices, at best, are going to level off. So long as home prices are not rising, the reset problem exists," said Bill Hampell, chief economist at the Credit Union National Association in Washington.
In addition, the rates on most of these subprime mortgages only adjust up and never down, regardless of interest rate conditions in the market.
Over the next year about $165 billion in prime adjustable rate mortgages are subject to resets, along with the $370 billion in subprime mortgages subject to reset. With prices falling, those resets are expected to lead to a cascading wave of foreclosures.
"The interest rate is only a relative part of their problem. They have too much mortgage and they basically were promised that the equity in their house would grow and that they could refinance," said John Taylor, president of the National Community Reinvestment Coalition.
Many homeowners who financed their homes with subprime mortgages did so expecting the value of those properties would rise, enabling them to refinance out of their pricey mortgages and into loans with better terms.
But the housing market turned down and it continues to slide.
HOME PRICES FALLING
Over the 12 months through November, prices on previously owned homes fell 3.3 percent, according to the National Association of Realtors. In Western areas of the United States where home prices rose sharply during the boom, prices tumbled nearly 7.0 percent.
In addition, new home construction has slowed to just half of the pace it hit when it peaked in 2006, and experts say it will not pick up until record high inventories of unsold homes are pared back. For that to happen, prices may need to fall further.
Fixed mortgage rates, which are tied to yields on long-term bonds that fluctuate on the outlook for the economy, have dropped, but the spread between 30-year mortgage rates and the benchmark 10-year Treasury note has widened.
And for non-conforming fixed-rate mortgages, those in excess of $417,000 -- commonly known as jumbo mortgages -- the spread is even wider.
But tighter credit, brought on by a rise in foreclosures, has not led to better rates for riskier borrowers who do not qualify for traditional fixed-rate loans.
"Rate cuts don't change the risk profile of borrowers out there," cautioned Bill Dunkelberg, chief economist at the National Federation of Independent Business.
What's worse is that if the economy slows, and consumers lose their jobs, that could add up to more foreclosures, outside of the subprime arena, cautioned Hampell.
"A recession would add on top of that some additional foreclosures and that's not (a scenario) that we've been factoring in so far," he said.
(Reporting By Joanne Morrison; Editing by Clive McKeef)