Fed cut: Easier on home borrowers too

NEW YORK (CNNMoney.com) -- When the Fed cut its discount rate by half a point Friday, Wall Street celebrated. Home buyers and sellers may have reason to cheer as well.

The discount rate is the one the Federal Reserve charges qualified lenders, mainly banks, for temporary loans. Lowering interest rates encourages banks to lend more money to mortgage borrowers.

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That in turn could make it easier for home buyers, especially those using big-ticket loans called Jumbos, to get financing.

"It's a way to unfreeze the market," said Doug Duncan, chief economist for the Mortgage Bankers Association (MBA). "Once you get trades moving, then people start to look around for the best deals."

"The move could ease the squeeze for some banks and lending institutions," said Ken Goldstein, an economist with business management researcher the Conference Board. "The practical impact is that you're telling everyone that the lender of last resource is still in business."

"People are borrowing from the discount window in pretty big chunks right now," said Dean Baker, director of the Center for Economic and Policy Research. Still, he believes, the impact on mortgage borrowers will be minimal.

"Subprime, Alt-As and jumbos will still be under pressure," said Baker, "because you still need someone to hold them."

For Duncan, however, the move could add some grease to the market wheels. "The critical issue was getting the jumbo piece moving. Once that moves, then getting Alt-As moving and then even subprimes" are next.

According to David Wyss, chief economist for Standard and Poor's, the biggest obstacle to lenders, such as Countrywide Financial (Charts, Fortune 500), is that they have been unable to obtain short-term financing to enable them to keep issuing loans. The Fed's latest move means they can.

"It provides emergency liquidity for securities backed up in the financial markets because people are afraid to buy them," said Wyss. "It announces that the discount window is open for business and that means there will be mortgages available."

Even more significant, according to Wyss, is that the Fed extended the length of the loan to 30 days, giving lenders a larger window they can use to place loans with other investors.

"The Fed is saying any liquidity you need for these funds, come to us - we'll give them to you."

For Joe Mason, an economist and professor of finance at Drexel, the 30-day window is not long enough.

"[Lenders] are going to have to roll that over in 30 days, max," he said. "The problems will take a lot more than 30 days to work out."

Mason also cited Bagehot's rule, a basic banking principle which he explained as the need to distinguish between illiquid and insolvent organizations. "You want to lend to illiquid but not insolvent institutions," he said. Lending to insolvent institutions just enables them to dig themselves an even deeper hole.

To him, that's what seems to be happening.

"I would argue that Countrywide is insolvent. Their only asset is their pricing platform, their business algorithm, and that's not working. The next biggest asset they have is the toner for their copiers."