Struggling homeowners won't find Fed aid

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The Federal Reserve's recent rate cut won't help millions of people facing spikes in their monthly mortgage bills.

That's partly because their mortgage rates and terms are set by global investors in London, rather than in the United States.

Adjustable-rate mortgages (ARMs) with low initial rates and payments that increase in three to five years became popular — and even a necessity — during the housing boom as escalating home prices put buying a home increasingly out of reach, especially for young people and minorities buying their first homes.

By last year, ARMs with initially affordable payments were used in more than half of the home sales in Washington and other big cities.

But the fate of these borrowers now lies overseas.

Three-quarters of the ARMs taken out by buyers with shaky credit standings and about a quarter of the hybrid ARMs taken out by those with good credit ratings are tied to the London Interbank Offered Rate, or LIBOR, which is set by global banks in London.

In addition, global investors who had been buying riskier loans are now spurning them.

That is a dramatic change from only a few years ago, when most ARMs in the U.S. were tied to the prime rate set by American banks or rates on Treasury bills largely controlled by the Fed. At the time, the Fed could provide immediate relief to overburdened ARM customers with rate cuts, but now the Fed is only one of many powerful global forces that determine the level of such short-term interest rates.

"The United States and its financial system no longer stands alone the way it once did," said Christopher Cagan, research director at First American/CoreLogic, a financial-information company. "It"s not the sovereign world the way it was in the 1960s."

Foreign investors — from Chinese bureaucrats to European banks and Middle Eastern sheiks — have become indispensable buyers of U.S. debt, whether issued by the Treasury, corporations or individual home buyers whose loans are bundled with other mortgages and sold as a package to investors.