"LITTLE RELIEF" Guess they will have to bring the rates down to 1-2%... Fed's Rate Cut May Give Little Relief to Homeowners (Update1) By Bob Ivry Enlarge Image/Details Sept. 24 (Bloomberg) -- Americans may be disappointed that the Federal Reserve's interest rate cut won't translate into lower monthly mortgage payments and a revival of the housing market. ``Mortgage rates won't stimulate demand,'' said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. ``The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.'' The average 30-year fixed mortgage rose 0.10 of a percentage point to 6.08 percent today, according to North Palm Beach, Florida-based Bankrate.com's survey of banks and lenders in the 50 U.S. states. It peaked this year at 6.42 percent on June 14, Bankrate.com said. The housing industry, now in the second year of its worst recession since 1991, erased 0.6 percent from gross domestic product in the second quarter. Home prices probably will fall on a year-over-year basis for the first time since the Great Depression of the 1930s, Anderson said. Investors concerned about inflation following the Fed's half-point interest rate cut have driven up the yield of 10-year Treasury notes by 23 basis points, or 0.23 of a percentage point, to 4.7 percent. The increase has dashed hopes that lower home-loan costs might entice more Americans to overcome their fear of falling prices and buy homes. The Sept. 18 decision by the Federal Open Market Committee to reduce its benchmark interest rate to 4.75 percent from 5.25 percent doesn't mean mortgages will follow, said Michael Darda, chief economist at the equity trading and research firm MKM Partners LP in Greenwich, Connecticut. Bond Yields ``Lock in your rate now,'' Darda said. ``Long-term bond yields will put a floor under how much further mortgage payments will go down.'' The Fed lowered its target for federal funds 13 times from Jan. 3, 2001, to June 25, 2003. After each cut, mortgage costs fell eight times and rose five times, according to Bankrate.com. Sales of existing homes declined for the fifth straight month in July, falling 9 percent from a year earlier, according to the Chicago-based National Association of Realtors. New-home sales rose 2.8 percent in July, according to the Commerce Department in Washington. Sales dropped 10.2 percent in July on a year-over-year percentage basis, according to the department. Rising defaults in subprime mortgages, made to borrowers with bad or incomplete credit histories, killed demand for mortgage-backed securities, stopping the flow of money to lenders and making it more difficult for home buyers to secure loans. Tighter Credit ``We are, at the Federal Reserve, mostly concerned with making sure that markets continue to function normally and that the tightening of credit that has happened does not have adverse effects on the broader economy,'' Chairman Ben S. Bernanke told Congress last week. Total mortgage originations fell 8.8 percent in the second quarter to $730 billion from a year earlier, according to Inside Mortgage Finance, an industry newsletter. The number of subprime mortgages fell 66 percent to $56 billion, according to the newsletter. Mortgage originations may drop to $460 billion in the fourth quarter, down 36 percent from a year earlier, according to the Mortgage Bankers Association in Washington. Treasury Secretary Henry Paulson told Congress on Sept. 20 certain markets are ``still operating under stress,'' including the one for jumbo loans, or mortgages of more than $417,000. Jumbo Loans Average rates for 30-year fixed jumbo mortgages rose to 7 percent today from 6.96 percent last week, Bankrate.com said. RealtyTrac Inc., an industry research firm in Irvine, California, said last week that the number of Americans who may lose their homes to foreclosure more than doubled to 108,716 in August from a year earlier. That figure may increase as monthly payments for 450,000 subprime borrowers adjust higher in the next three months. At least a quarter of those homeowners have missed mortgage payments before the rate reset. The average five-year adjustable-rate mortgage rose to 6.05 percent today from 5.99 percent last week and the average five- year adjustable jumbo loan increased to 6.50 percent today from 6.47 percent last week, according to Bankrate.com. Tighter lending guidelines are the biggest challenge facing borrowers, not mortgage rates, said Scott Tucker, a mortgage marketing consultant in Chicago who has a Web site he calls Mortgage Marketing Genius. Lenders are requiring borrowers to make higher down payments and prove they have cash reserves they can use for future payments, he said. ``To paraphrase Will Rogers, the banks are not concerned about the return on their money, they're concerned about the return of their money,'' Tucker said.