Struggling homeowners won’t find Fed aid

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.

Foreigners own nearly half of the U.S. Treasury”s debt, a third of U.S. corporate debt, and nearly a fifth of the mortgage securities backed by Fannie Mae and Freddie Mac, said Joseph Quinlan, chief market strategist at Bank of America Corp.

Although the foreign investment helped fuel the housing boom, that gusher of support is not likely to be repeated, he said.

“Given all the problems in U.S. housing and the toxicity of the U.S. mortgage markets, foreigners are not likely to boost their share” of mortgage debt any time soon, he said.

The enormous foreign appetite for such U.S. paper in recent years was linked to huge U.S. trade deficits. Because the U.S. imports far more than it exports, it sends out more than $800 billion into the world economy each year than it draws in, placing that money into foreign hands, Mr. Cagan noted.

The widespread placement of U.S. debt throughout the world is the reason why the subprime debacle that broke out this year as U.S. default and foreclosure rates spiked has had far-reaching global consequences and why U.S. borrowers are having a much harder time getting foreigners to open up their wallets and lend to them again, he said.

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