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Despite Fed Cut, Mortgages Now More Expensive

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As incredulous clients are learning, mortgage rates are higher now than last week, back up to 6.5 percent for vanilla 30-year. Yes, higher. ("Sonny, you should be ashamed to try to trick an old lady! I still read the newspaper! You rotten crooks.")

Federal Reserve Chair Ben Bernanke probably has the same frustrated shoulder sag that we do: he played this thing exactly right, and has gotten nothing for his trouble but a run on the dollar. The markets have been seized by Amateur Hour: inflation bears, gold bugs and the Buzz Lightyears of global growth. Doubly, triply frustrating -- they may be right.

The Fed's 0.5 percent was actually two quarters: the federal funds rate had been trading near 5 percent, 0.25 percent off-peg, for a few weeks. That was an intermeeting ease not formalized, a deft piece of central banking: if formalized, and then the crunch dissolved by itself, the Fed would have had to execute an embarrassing formal reversal. Instead, Sept. 7 news of sinking payrolls (an economic fade additional to and independent of housing and the crunch) made it easy to formalize the first quarter and add another.

At this moment the economy receives some dinky benefit from the cut (Construction money is 0.5 percent cheaper -- wanna build a house? Short-term rates are down -- how about a nice new neg-am pre-pay-penalty ARM? No?), but the crunch is still in place, especially in Mortgageland.

Other benefits have been cancelled. The 10-year T-note, driver for all long-term credit, has soared from 4.35 percent to 4.7 percent. The dollar run (I hate to use the term, but that's what it has been since Tuesday) has been to the euro (now all-time $1.41) and to hard assets: gold at a 27-year high $744 and oil at one moment yesterday $84.


Basically, it seems that Bernankes rate cut has had the desired effect of reducing short term interest rates but has raised inflationary expectations which has driven some long term rates up. As most US home buyers take out mortgages on long term fixed rates this is actually going to drive the cost of their borrowing up and may deter some from entering the housing market. It is therefore entirely possible that perversely the Feds move will actually make the US real estate bust worse. Of course, Bernanke's decision to cut rates had nothing to do with rescuing cash strapped US sub prime borrowers and everything to do with bailing out the financial institutions who he is paid to serve.

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