The Fed's Cut Won't Save Struggling Homeowners

Lower short-term rates may be just what was needed to restore confidence to financial markets and keep the economy out of a recession, but it won't bring much relief to homeowners who are struggling to make their mortgage payments.

Although stocks rallied sharply after the Fed lowered rates by 50 basis points -- with the Dow Jones Industrial Average rising 2.5%, its biggest percentage gain since 2003 -- it won't help the millions of Americans with adjustable-rate mortgages refinance into a fixed-rate mortgage before their payments jump.

That's because fixed mortgages rates are more closely pegged to 10-year Treasury yields than short-term interest rates. And long-term Treasury yields have already come down over the past few weeks as investors who have been spooked by the mortgage crisis have fled to the relative safety of government bonds, pushing prices higher and yields lower.

Now that the Fed has come to the economy's rescue, Treasuries are likely to lose some allure. That means prices are likely to fall, and rates, which move inversely to prices, to move back up.

"Fixed-rate mortgages have been known to rise, despite Fed cuts, particularly if the inflation environment seems troublesome," says Keith Gumbinger, vice president of HSH Associates, a consumer loan research group.

The benchmark 30-year fixed-rate mortgage fell 22 basis points last week to a four-month low of 6.28%, according to a national survey of large lenders by Bankrate.com.

In other words, if you weren't able to refinance into a fixed-rate loan over the past few weeks, when rates fell in anticipation of the Fed's move, you probably won't be able to now that the central bank has actually cut rates.

The news for homeowners isn't all bad, however. Lowering the fed funds rate to 4.75% will have a direct impact on other kinds of consumer debt that's linked directly to the prime rate, including home equity loans, lines of credit and some credit cards. Banks are likely to cut the prime rate by half a percentage point, to 7.75%, over the next few days.

Gumbinger notes that borrowers who have a "piggyback" mortgage -- essentially a second loan to cover the down payment on a house -- have seen their monthly payments keep rising as the Fed raised short-term interest rates 13 times starting in 2004. He says consumers could see a cut in the rates they pay on home equity loans and lines of credit as soon as next month.