Rate cuts may help troubled homeowners

SACRAMENTO, Calif. -- A desperate slashing of interest rates may ease some of the nation's economic jitters but may not be enough to stave off recession. It also probably won't provide an immediate fix for a deepening foreclosure crisis that has moved into uncharted territory in California.

As the Federal Reserve announced a key interest-rate cut of three-quarters of a point Tuesday, new statistics showed that foreclosures and defaults during the fourth quarter of 2007 were the highest ever recorded in California. One analyst said it's likely that foreclosures will continue to climb.

DataQuick Information Systems Inc. said foreclosures in California jumped to 31,676 in the quarter, the most since DataQuick began tracking those numbers in 1988. For the whole year, foreclosures rose sevenfold, to a total of 84,375.

Perhaps more troubling was the continued rise in notices of default, issued by lenders after homeowners miss two or three mortgage payments. Defaults often lead to foreclosures.

Statewide defaults totaled 81,550 in the fourth quarter, the most since DataQuick began compiling those figures in 1992. Defaults more than doubled, to 254,824, for the entire year.

"We're still climbing to a peak in foreclosure activity in California," said DataQuick analyst Andrew LePage. "We don't even have a sign of the peak."

The Fed's interest rate cut is likely to help somewhat. It will translate into lower rates on home equity lines of credit, spelling relief for many cash-strapped homeowners, said Fred Arnold, president-elect of the California Association of Mortgage Brokers.

The cut also may improve consumer confidence and bring some potential homebuyers "out of the woodwork," said Arnold, a broker in the Santa Clarita area.

But the move won't by itself revive California's dormant housing market. Arnold said it will do comparatively little for the thousands of subprime borrowers whose adjustable-rate loans are due to reset this year. The monthly payments for those borrowers will still shoot up significantly, he said.

Some may find relief in a plan announced by the White House last fall that calls for rates on adjustable-rate mortgages to be frozen for certain homeowners who are current on their payments.

For potential buyers, rates on 30-year fixed mortgages already have come down as the market anticipated some lowering by the Fed. But they likely won't go much lower, Arnold said.

Rates are averaging 5.42 percent, according to Bankrate.com. Rates on jumbo loans above $417,000, a threshold that covers much of the California market, are about a point higher.

The decision by the Fed also will translate into lower rates on car loans, credit cards and many business loans.

Nonetheless, it's unlikely the cut will be enough to prevent a recession, said senior economist Scott Anderson of Wells Fargo & Co.

"This is not going to be a panacea," Anderson said. "The credit system, the banking system, is very much frozen up. We're concerned about Main Street -- the supply of loans to businesses and consumers." He believes the chance of a recession in the next six months is 50 percent.

"It could get ugly very quickly, and this is what the Fed is responding to," he added, noting that the Fed signaled it may cut rates again.

Even if it doesn't prevent recession, Anderson said the Fed's action -- in tandem with a $145 billion economic plan being negotiated by President Bush and Congress -- will help the economy recover more quickly.

Reach Dale Kasler at dkasler(at)sacbee.com. For more stories visit scrippsnews.com