Banks still need to make loans if they want to make money. While each day seems to bring more bad housing-related news, there is still money available at reasonable rates to finance the purchase of a home or refinance the loan on an existing home-for the right borrowers. If you are the right borrower, keep an eye on the market in the coming months for your opportunity.

The Federal Reserve released their minutes from the October 31st meeting this week. In the minutes, the Fed offered investors reassurance that the central bank will be compassionate when it comes to its Dec. 11 decision on interest rates. Until then, there was growing hope that an emergency Fed rate cut could occur since government-sponsored mortgage giant Freddie Mac has been funding concerns. Expectations for an emergency cut are unlikely to go away.

The Fed focused on heightened risks to the growth of the economy, noting that coming quarters would be weak on the back of financial market turmoil, tighter credit conditions, and deeper deterioration of the housing market.

The credit markets are hardly back to normal. They are nearing August panic levels with relatively persistent flight-to-quality trade in Treasury bonds, selloffs in commercial paper markets, corporate bonds, and rising rates on Libor. That means banks are anxious and raising the rate at which they'll lend money to other banks. If it really is August all over again, investors should keep their eye on the Fed's discount window.

The Fed cut rates for the second time in as many meetings. "Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy ..." indicating that another cut may not come as readily. But what of all the worry we saw in August in the stock market and the subprime worries. Have they gone away? Have we relabeled it to the home equity line of credit worries. How about the fact that credit card debt is now getting attention since people are using advances to cover their new reset mortgage payments? Will we not believe there is a problem until Bank of America, Wachovia or Washington Mutual tell us it is time to worry? I think people need to get more acquainted with the economy and less concerned with whether Britney gets custody.

This Tuesday's reduction in interest rates, whether it's 25 basis points or 50 basis points, will do little to resolve housing's depression and little to reduce the probability of a 2008 recession as the record level of unsold homes, the pace of mortgage resets, the likely deterioration in coming jobs reports and still-stretched affordability issues suggest that the inherent supply/demand imbalances will continue for some time. Or at least the next several interest rate cuts.

How bad can it get? Investment adviser John Mauldin recently published a month-by-month account of the dollar amount of mortgages that will be reset through 2008, and the largest reset amounts pop up in the first six months of next year. In fact, as he points out, the $197 billion of mortgage resets so far this year is "less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007, or $521 billion."
So, we haven't even begun to feel the pain yet. It's bad enough for the folks who will find that they can't keep up with the higher mortgage payments and will have to move out of their homes. It's almost the same as homeowners trying to find buyers for their homes – nearly impossible in a market where home prices are falling.
The Fed can try to calm such fears all it wants by lowering the discount rate and giving banks more time to pay back loans (from overnight to 30 days), but the real problem can't be fixed with more access to credit. The fact is nobody wants any more of that. What they really want is cash to pay off their debts. And the bad news just keeps accumulating:
Housing prices dropped 3.2% percent in the second quarter compared with last year, the largest drop since Standard & Poor's started tracking home prices in 1987.

Since last Thursday's mortgage industry relief rally in the stock market, the shares of the big lending companies have resumed their swoon. The reason? The U.S. housing industry keeps getting sicker. Observers are starting to wonder what favorable terms Bank of America's http://bankofamerica.com/ 2 billion wrung out of struggling Countrywide. It appears the end is not so near. According to the minutes from their last meeting, the Fed said that the worsening mortgage situation could lead to a housing slump deeper and more prolonged than it had seemed earlier this year.

Vojak, Team Player

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