Mortgages: (missed) effects of FED rates cut, and differences between Europe and USA

FED cut rates again, bringing them to 4.50% from 4.75%. But it seems that stock markets didn’t get overjoyed of this correction, that maybe consider this cut as a further confirmation of the today situation’s seriousness.

Yet, there are a few things we have to keep in mind. First of all, the subprime crisis was set off by subprime mortgages, but has different roots, that came from financial institutions attitude in the past year. It is surely not by chance that today most stocks that are suffering are banks’ ones.

Briefly (and with rough simplification) what happened is that while a few years ago banks lent their depositors’ money, so it was their interest to see the loan repaid, today they sell the credit, therefore banks get their earnings when a loan is subscribed, and the repayment isn’t anymore their problem.

As a consequence of today’s credit thightening, housing market suffers, since it’s more difficult to borrow money to buy an house. In the US there are people starting to bury St. Joseph satues in their yard in the hope the Saint will intercede for finding a buyer (this isn’t a joke: the company that sells the statue triplicated sales in the last couple of months).

What will happen in Europe, and in Italy? I think automatic parallelism between USA and Europe should be avoided: in Europe, ECB rates “just” doubled, going from 2% in 2003 to 4% in 2007. In the US the FED rates quintupled, going from 1% in 2003 to 5,25% in June 2006, a real drain for borrowers, if you consier the weight of interests on mortgage payments.

Original post (in Italian): Mutui: (mancati) effetti del taglio della FED e differenze USA-Europa

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