Can the Fed rescue the Subprime Market?

In the last meeting of the Federal Reserve, Chairman Ben Bernanke and colleagues chose not to lower the interest rates. However, not too long after that meeting on August 17, Bernanke chose to cut its discount rate, the interest rate on loans made directly to banks by the Federal Reserve. This has led to a tumultuous time for Wall Street.

Since the start of trouble in the subprime mortgage loan sector at the beginning of this year, lenders and homeowners alike have been tossed back and forth by the winds of change and uncertainty. The equity markets have suffered some of their worst losses in the last half century with hedge funds being hit the hardest. This coupled with the rise in oil prices and stagnating domestic growth, all eyes are now turning to the the Federal Reserve to do something to stem the tide. Many of those calling for action, remember the hands on approach by Bernankes' predecessor Alan Greenspan. During the tenor of Greenspan, immediately after the tragic September 11th crisis and the "Internet Bubble" meltdown, the Fed Chief lowered the interest rates multiple times in an effort to stem the time of a looming recession. A hands on approach that many believe was a precursor to our current mortgage woes.

While this is a positive approach that will aid in the salvation of mortgage lenders, hedge funds and wealthy investors who are tied closely to the money supply issues, how will lowering the interest rates assist the everyday homeowner? A lower interest rate is a blessing in the sky to those homeowners who mortgage payments are tied to Adjustable Rate Mortgages or ARMs as they are commonly known. But, is this truly the answer to the homeowners' woes?

I am not sure that lowering the Fed Fund Rate, the rate by which the lenders tie their mortgage rates to will be the answer? The truth to the matter is that when interest rates were at a historic low, many of the lenders at the time dropped the ball. Loans were made to available to the subprime market at an astounding rate. The borrowers were a gigantic overall risk, but because of the loose money supply spurred on by lower interest rates, lenders saw an opportunity to grow their portfolios. This resulted in loans being made to individuals who ordinarily did not qualify. Not to mention the growing segment of the mortgage borrowers who fit into a class of loans known as "Alt A". These were borrowers who possessed marginal credit that were not all together disqualified under normal terms, but did not possess credit that met the industry standard. Many of the "exotic" loans such as "interest only" loans and "no doc" loans were a product of this group.

Whatever the Federal Reserve and Ben Bernanke choose to do over the next few days, it is apparent that a call for swift action is needed. Homeowners are falling by the wayside. In the face of an oncoming tide of continued credit woes, the subprime meltdown is looming threat that must be taken seriously.