What will be the future for Home Loan Rates this year?

Rate cuts, and new loans

The Fed has slashed interest rates over the past year to 2% from 5.25%, but that's the least of what they've done. In addition to traditional rate cuts, the Fed has instituted several innovative emergency loan programs to provide liquidity to commercial and investment banks.

The Fed has now moved to the sidelines - unwilling to move rates lower due to the threat of inflation and having promised to keep lending cash to financial institutions until at least the New Year.

My guess is that the programs will need to be in place longer to prop up the skittish mortage market.  The recovery to the financial institutions will not happen in the next 4 months. 

Despite this frenzy of action, there is no end in sight for the financial market turmoil and the related housing market downturn, many experts say.

"I have a feeling that it is far from over," said Barry Eichengreen, an economic historian at the University of California at Berkeley. Eichengreen and other experts see mounting credit woes for banks from credit cards and other consumer loans.

I think this is a big issue in front of us.  If consumers do continue to grow their credit card debt and with the resets on interest rates in place with the credit card companies now surprises are ahead of us.  What I mean is if you miss even one payment date your interest can skyrocket on not just that account but all of your accounts.  Be aware of the interest rate resets!

"I think there will be another wave of mortgage-related problems, emanating not from the subprime part of the market anymore, but from people with slightly more normal credit and mortgages," he said. "It is entirely plausible that there will be some hedge fund failures and commercial bank problems."

"I think this is going to bubble along for a while now," he said.

Former IMF chief economist Ken Rogoff reportedly told an audience in Singapore earlier this week that a large U.S. bank was likely to collapse in the new few months.

Since the beginning of the year, financial markets have reeled from one crisis to the other and remain very fragile. "You don't have the resilience now to shake off bad news," said Phillips, now dean of the business school at George Washington University.

Fannie, Freddie

The current crisis surrounds the worsening conditions of Fannie Mae (FNM) and Freddie Mac (FRE) , with many expecting a government bailout of the two mortgage giants.

To be fair, the economy has navigated the top part of the mountain in pretty good shape.

"I don't mean to sound like Phil Gramm...but there has been a huge amount of financial market disruption and the actual impact on the real economy has been limited," said Adam Posen, deputy director of the Peterson Institute for International Economics.

Gramm, a former senator, quit as a top economic adviser to Republican presidential candidate John McCain, after he said Americans were "whining" about the economy.

So far this year, there hasn't been a negative gross domestic product number.

And it is very easy to overstate the problems of the financial system, warned Minneapolis Fed Gov. Gary Stern in a television interview earlier this week.

But other economists are simply unsettled.

"It is not as if there are not some positive signs, but to me they are not consistent enough for me to be positive," said Phillips.

The fact remains that the first necessary condition for repair of the markets - the bottoming of the housing market - is not in sight. Until the housing market bottoms, it will not be clear how many losses the banks need to realize.

This statement you need to take city-by-city and actually neighborhoods within each city.  Many areas have bottomed out and are seeing price stability.

"Looking ahead, there is still substantial uncertainty about the ultimate realized magnitude of loss on mortgages in 2006 and 2007, said Richmond Fed President Jeffrey Lacker this week. "That uncertainty is out there - and that means still the potential for other shoes to drop."

"We are going to continue to see some at least moderate level of stress," said Lacker.

Robert Eisenbeis, a former researcher at the Atlanta Fed, said he is not confident that financial institutions have taken all the losses that they will.

Fundamental questions remain about the business of investment banking and commercial banks. "I don't think anybody knows yet how big and how viable a particular business is going to be," Eisenbeis said.