U.S. Fed cuts and stimulus package won't stem foreclosures

By Joanne Morrison - Analysis

WASHINGTON (Reuters) - For Main Street, interest rate cuts and a plan by the White House and Congress to pump $150 billion (76.6 billion pounds) 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.