CNBC's Diana Olick and others on the Fed cut and the "mortgage despair cycle"

I know the housing cheerleaders are all excited, and desperate homedebtors looking to unload are all in a tizzy, but sorry, bad news. The Fed could (and might) cut to zero, but it ain't gonna help. China and hedge funds ain't gonna buy the CDO's anymore, the Fed funds rate does not set mortgage rates, the toxic mortgages are still gonna reset, foreclosures are still gonna soar, and housing is still wildly overvalued.

And remember, as the stock market soars - stocks ain't houses. Mutually exclusive investment classes. Invest accordingly.

Diana Olick: Since we’re all "Fed, Fed, Fed," it behooves me to weigh in on how a Fed rate cut would affect mortgage interest rates, not to mention the current mortgage despair spiral, as lenders run for cover and investors turn up their collective noses. From everything I hear, it’s not going to do much in the short term, but rather than hear it from me, I thought I’d pose the question to some of my fave experts and let you hear from them:


Bill Seidman/Fmr. Head of FDIC, CNBC Chief Commentator: "If credit is bad, rates don’t count. I don’t care if you lower the rate 100 basis points. It may improve some of the profits of those institutions that lost a lot of money due to bad credit, but it does not address itself to the real problem, which is bad lending. And let me emphasize: it’s not just subprime, it’s substandard lending."

Jay Brinkmann/Mortgage Bankers Assoc.: "The Fed rate cut has already been priced in."

Howard Glaser/Fmr. HUD Official, Mortgage Industry Consultant: "My view is that the effect is likely to be limited – probably a short -term psychological boost more than a fix for mortgage market liquidity... You could lower the rate to zero and those loans (subprime, alt-a) are still not coming back."

What effect (if any) will the Fed's desperate rate cut have on the housing crash?

Have at it...

Fed cut impact on housing

The Fed Funds rate affects a range of consumer loans, including home equity and mortgages. Lower mortgage rates would add to the number of home buyers able to afford to make purchases, increasing demand for properties and buoying home prices. Buyers generally care less about the actual purchase price than they do about the size of their payments. If rates drop, so will monthly debt obligations.

However, the real problem in the housing market is not interest rates, according to Keith Gumbinger, vice president for HSH Associates, a mortgage industry publisher. It is that there is not enough money available for making loans.

"The liquidity problem hasn't changed," Gumbinger said. "The primary issue is trust between buyers and holders of debt." Investors holding worthless or heavily discounted paper are not eager to buy more.

Home prices in many parts of the country remain out of reach for average Americans, leading to slow sales and lengthening inventories of houses on the market. Also adding to listings is a flood of new foreclosures hitting the market.

HousingPANIC Stupid Question of the Day

When will Bernanke and the Fed panic and cut the Fed funds rate?

A) By next week

B) September

C) October - December

D) Not gonna cut until next year

E) Next move will be a rate hike

Bonus Question: Inflation, Stagflation, Deflation, Reflation or Desperation?

Fed Governor Poole just yesterday - "Only a calamity" would justify interest rate cut. The market and MSM got it wrong today.

The bankruptcy of Countrywide (I'm short) and a classic run on the banks would be a calamity. 10 Million homedebtors losing their homes would be a calamity. $8 Trillion in housing wealth going bye-bye would be a calamity.

What Poole told the market yesterday is that the Fed ain't gonna lower rates anytime soon, and not until something big happens (i.e CFC goes BK). And the market and MSM got it wrong today - the Fed didn't lower, they simply opened up the discount window. Big difference.

They opened the window to improve liquidity. They didn't cut the ever-important Fed Funds rate, which is what Poole was talking about. Those exploding ARMs are still exploding, Mozilo is still selling, Countrywide owns cancer loans, panicked customers and a defunct business model, housing is in meltdown, and the ARM homebagholders don't have any access to refi loot anymore. Tilt.

Bottom line - lowering the discount rate, or even the funds rate, won't make the bad man go away - they were called "liar's loans" for a reason don't forget... And don't forget that the Fed is hilariously for the first time taking mortgage CDO's as collateral. In other words, the lender of last resort (the taxpayer), like with the S&L disaster, is about to get slaughtered.

Here's Poole yesterday:

William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a ``calamity'' would justify an interest-rate cut now.

Poole, who confers regularly with regional business contacts and votes on rates at the Fed this year, said in an interview yesterday that ``no one has called up and said the sky is falling.'' The best course is for officials to assess economic figures, including the August jobs report, when they next convene on Sept. 18, he added.

``It's premature to say this upset in the market is changing the course of the economy in any fundamental way,'' Poole, 70, said in the interview at the bank's St. Louis headquarters. ``If the Federal Reserve were to act when it turns out there is no impact, then clearly the market would say these guys really don't have the intelligence they need to have a policy actually based on solid evidence.''