Just in time for the Federal Reserve's Open Market Committee meeting on rate policy, the Fed got some relevant new information to help the committee decide whether a rate cut is called for, and if so, how much of a percentage to cut. They got more then they needed with the RealtyTrac foreclosure report and a tame inflation reading from the Labor Department.

The RealtyTrac monthly report of default notices, auction sale notices and bank repossessions found that the number of foreclosure filings in August 2007 (243,947) more than doubled over August 2006 (113,300) and leaped 36 percent from July, suggesting that homeowners are in a bind. They can't sell their homes or make their payments in a tighter credit market. The logjam spilled over into business with fewer jobs added in July than forecasters anticipated -- only 4000 when 100,000 were anticipated.

That alone would not have moved the Fed, but finding out that inflation was at a near standstill did. Wholesale prices dropped 1.4 percent, leaving core consumer prices, excluding energy and food, at 0.2 percent. That's as close to a stall and perilously close to recession as the Fed would like to see.

The Fed responded aggressively with a 1/2 point cut in both key rates that it dictates. The "discount" rate is the rate at which national banks that are members of the Federal Bank, or FDIC can borrow money directly from the Fed. That rate was cut 50 basis points on August 17, 2007 and again yesterday by 50 points until the discount rate now stands at 4.75 percent. The "federal funds" rate, a target rate that the Fed recommends that banks borrow from each other, impacts consumer borrowing -- credit cards, car loans, and mortgage interest rates. That rate was also cut 50 basis points to 4.75 percent. The discount rate is designed to improve liquidity for the banks themselves. The federal funds interest rate is designed to improve or limit liquidity or access to credit for consumers.

Both are short-term or overnight rates. Short-term loans are higher cost than longer-term rates such as mortgage loans, so the assumption is that mortgage interest rates will drop accordingly on the news of lower short-term rates because treasuries, also a long-term bond, tend to rise in price and lower in yield, tend to fall in a falling rate environment.

The idea is that a slowing economy and lower cost of money will allow banks to make more attractive mortgage loans to borrowers at better rates.

If that's not enough to save the economy from over two million at-risk loans, the federal government can also take other actions. While President Bush has already said he doesn't believe that FHA-insured loan ceilings (up to $417,000, bank loans through FHA are federally insured) should be raised, higher limits could accommodate more borrowers into refinancing their high risk loans into new products that will keep the homeowners out of foreclosure and allow borrowers in high-priced areas such as California to buy median-priced homes with federally-insured loans.

To that end, the U.S. House of Representatives passed the Expanding American Homeownership Act of 2007, H.R. 1852. While some object to bailing homeowners out who may have knowingly taken on too-risky home loans, the legislation will offer home buyers a safer alternative to risky mortgage products and help many homeowners who may be facing foreclosure.

Again, the idea is that easier money will smooth the housing market and the economy, in general.

The FHA modernization legislation would increases loan limits, eliminates the statutory 3 percent minimum cash down payment, and gives FHA the flexibility to provide risk-based pricing. FHA's loss mitigation program includes mortgage modifications, allowing borrowers to change the terms of their mortgage so that they can afford to stay in their home. The program also offers "partial claim" programs in which FHA lends the borrower money to cure the loan default. This no-interest loan is not due until the property is sold or paid off.

But not everyone agrees that such subsidies are a good idea, even if they calm the markets for the short therm. A new study released by the National Taxpayers Union warns that some proposals could cause more harm than good.

"The government bailout is only going to reward people who made bad decisions -- both borrowers and lenders -- and if we reward bad decisions, it's only going to encourage more people to make these bad decisions in the future," said study author Jacob Vigdor, Associate Professor of Public Policy Studies and Economics at Duke University.

The NTU writes, "In the first three months of 2007, two percent of the approximately 44 million residential mortgages being serviced in the U.S. were in the foreclosure process. A recent report from the Mortgage Bankers Association indicates that a number of the mortgages facing default belong to investors not actually living in these homes.

According to the report released by the National Taxpayers Union:

• "Overstretched borrowers, overaggressive brokers, and overeager lenders are bound to be hit when interest rates rise or home prices fall, especially for subprime participants. But the evidence so far doesn't indicate a "crisis." Delinquency, foreclosure, and held-for-sale rates of subprime mortgages originated in 2006 are higher than for loans originated in 2003 and 2004, but they are on par with those originated and securitized in 2000-2001.

• According to recent data, about 7 percent of subprime loans originating in 2006 were in danger of being held for sale, foreclosed upon, or going delinquent. Those not facing such problems may be squeezed, but, as Vigdor notes, "The only sure way to eliminate the high rate of foreclosures in the subprime market would be to eliminate the market entirely," depriving the other 93-95 percent of subprime borrowers of their American Dream.

• Public officials have called for foreclosure moratoriums, taxpayer- backed loans to troubled borrowers, and lender-restrictions that effectively rewrite mortgage contracts -- all of which socialize the risk while encouraging recklessness by borrowers and lenders. This "moral hazard" means that "wealth is redistributed from the responsible to the irresponsible, from the ethical to the unethical," Vigdor observes."

Instead of subsidies, the NTU would like to see other solutions employed -- "streamlined (and strengthened) disclosure rules to give both loan parties a clearer sense of their responsibilities; community-level financial education programs; and, foreclosure counseling ... . "

Meanwhile, mortgage and refinance applications, already up over 5.5 percent on lower interest rates from last week, are bound to surge which may take the heat off the government to intervene any further.

At least the stock market liked the Fed's effort. The Dow Jones closed with the biggest gain in years, up nearly 336 points to close at 13,739.39.

Published: September 19, 2007

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.