“Yes, this will help,” said Michelle Collins, senior vice president and director of mortgage lending with ShoreBank.

Mortgage rates tend to move in tandem with the federal funds rate. With interest rates so low, borrowers with secure jobs and good credit will find it very affordable to borrow. And to some degree, “It will make borrowing more affordable for all borrowers,” Collins said. “On the other hand, it is not a magic pill that will turn this whole thing around.”

The underlying problem is that the market uncertainty is caused by the subprime debacle and the increased number of foreclosures, Collins says, and this cut in the interest rates will not have any impact on the foreclosures. “It might have a positive impact on borrowers who are in adjustable loans that have not yet reset depending on the index their adjusting rate is tied to,” she says.

It’s too late if your adjustable has already gone up, she said. Obviously, the drop in interest rates for new home borrowers or borrowers who are refinancing, is a positive because banks can now offer a lower interest rate. “In past years, [an action by the Fed] like this would have spurred the real estate market like you cannot believe,” she said. “The real problem in the marketplace is that it is silent.”

Some economists and banking professionals are questioning whether a stimulus package is really what’s needed, and Collins agreed.

“Our economy is in trouble and we don’t have a solution,” she said. “It’s going to take some really creative thinking, out of the box, on a large scale, to find a solution.”

Economists in Chicago say the Fed’s actions are just part of the solution.

“I think what the Fed is doing is laudable,” said Michael Miller, professor of economics in DePaul University’s College of Commerce. The U.S. economy has two problems, he said. “We need to recreate confidence in the financial markets that these instruments can be priced; that we know what they are worth,” Miller said.

The other problem is the supply and demand issue. “One of the problems is the vast supply of unsold homes,” Miller said. “We can deal with that by lowering the interest rate.” It is just a matter of creating demand where you don’t have to create unreasonable mortgages, he said.

“I wish Bernanke had lowered rates [last week],” he said. “But everyone expected him to move 50 basis points. “Surprises are a more effective approach,” Miller said.

“[Lowering rates] between meetings is generally a big surprise.” David Oser, chief economist for ShoreBank, agreed. “This move was an absolute total stunner of a surprise,” Oser said. “Nobody expected anything like this.

“The Fed is not going to stop here,” Oser said. “Now we are at 3.5 percent and falling. It is a very fast moving situation.”

But he said he would be surprised if the Federal Reserve took the rate as low as 1 percent, which some economists are calling for.

“On June 25, 2003, the fed funds rate dropped its target to 1 percent, but it had not been that low since the 1950s,” Oser said. But, Oser said, you can’t compare these two periods. “We do not have deflation and that was what the Fed was worried about in 2003.”

This is a case of the Fed asserting its leadership in a financial crisis that its actions had trailed all of 2007.

“We’re not behind the curve anymore,” Oser said. “We’re there.”

The housing markets are not functioning very well right now, Oser said, due to the oversupply of housing and the vast numbers of people who bought earlier this decade.

“We are way overbuilt,” Oser said.

As a solution, he’d like to see a more thoughtful approach to immigration, one that could hold some answers for the housing market.

“The crackdown on immigration is hurting us,” Oser said. “These are people who would quickly become homeowners. “It’s my own personal hot button,” Oser said. “I think the strength of our nation is that people want to come here. People who are ambitious. Talented people who want to participate in an efficient economy where their talents will not be held back.”

Our current approach is “Throwing out a lot of babies and not a lot of bathwater,” he said. “I find it very counterproductive.”

Actually not very funny.

What do you think of this saying? Are you having a recession in your home? How are your neighbors doing?

About.com cites The Newspaper Definition:a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

But this definition ignore variables such as changes in the unemployment rate or consumer confidence. Second, the website says, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.

About.com says that the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) determines the amount of business activity in the economy by looking at things like employment, industrial production, real income and wholesale-retail sales. They define a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it’s called an expansionary period. By this definition, the average recession lasts about a year.

Debt —and recession —is what I discuss Jan. 11 in my column with David Oser, Senior Economist with ShoreBank.

By Sally Duros

The pile of credit card offerings awaiting shredding in my hallway is at least 6 inches deep, and that’s only about three weeks’ worth. Although I dislike debt as much as the next person, a healthy credit line has saved my rear more than once.

I’ve got plenty of company.

“When was the last time you heard someone say, ‘I am saving up for something?’ ” said David Oser, laughing, the chief economist for ShoreBank, Chicago.

“In our culture, if you have a job you have the right to unlimited amounts of credit. That has the unexpected benefit in that it smooths out the economy.”

It means we can keep buying even when times are tight and — ahhhh — what a blessing! Until the bills are due, that is.

We can, if we like, regard this credit card debt and our debt at large as part of a giant social science experiment that we are currently living through.

“Right now the way the world works economically, people in other countries make things, and we buy them,” Oser says. “We provide each other with services that cannot be provided directly.”

That’s the role of the United States. “By buying all that stuff, we improve the financial condition of people in other countries,” he says. “As long as that dynamic is beneficial to the world at large, there’s no point in worrying.

"[With credit] you can keep the wheels of commerce spinning. But this housing crisis has the potential to put a spike in that wheel,” Oser says.

He notes that now we are hearing reports of rising auto loan delinquencies and credit card defaults. A while back I reported that research from Experian, the consumer credit agency, found that some 40 million U.S. borrowers were paying their mortgages after they paid their credit cards — which is a reversal of conventional wisdom.

“Why was it easier to get behind on mortgages?” Oser asks. “The answer to that is that the last thing in the world the mortgage servicers want to do is to foreclose.”

It’s that much of a pain.

That’s one reason why Oser thinks the housing market’s recovery will take longer than we’d like. Another is the fact that the mortgage business is the biggest it’s ever been. “The gross domestic product is $13 trillion,” Oser says. “The total amount of mortgage debt outstanding is $11 trillion.”

And this $11 trillion in debt is spread out everywhere. When there’s a problem with a mortgage, the solution can be found only family by family, house by house. There is no top-down solution.

“Nothing ever moves in a straight line,” he says. “We will probably get to the bottom maybe in 2009.” Chicago has been fortunate in that our basic economy has remained strong in contrast to places like Detroit, and although the increase in home prices here has been considerable, it has not been outrageous.

“I am still in the camp of those who think a recession is unlikely — that is to say — a national prolonged serious recession,” Oser says. “I think Chicago is as well positioned as about anywhere one can imagine. But remember, a falling tide sinks all boats.”

Oser believes nationwide we might have a quarter or two of negative growth. But he also believes localities where prices floated the highest during the housing bubble are likely already immersed in their own recessions.

“I would be surprised if Florida, California, Nevada and Michigan were not already in a recession,” he says.

Usually problems in housing are caused by a bigger problem in the economy, but this is a kind of reversal — housing is causing the problems. It’s a situation that Oser says we probably have never faced before.

“It’s harder to say whether Chicago does or does not get a pass,” he says. “We are affected by things that are happening in other parts of the country like price inflation.”

As to the dynamics of our culture as consumer to the world? The situation will change and will no longer be beneficial to us when most of the people in China and India are in the middle class, Oser says. But that day is far off in the future. “That is so far outside the realm of my crystal ball,” Oser says. “My guess though is that within our lifetimes the pace of technology will be so exponentially faster things will be really different. Really.”

Nationally, the number of Americans signing contracts to buy previously owned homes fell 2.6 percent in November from October, according to the Realtors’ Pending Home Sales Index.

Last spring, Mark Zandi of Moody's Economy presented this slide in his housing forecast.

"The red line represents the savings rate of homeowners who have taken out home equity lines of credit, so they have cashed out (equity from their homes). You can see that their savings rate has declined sharply and their savings rate is now a whopping negative eight percent," Zandi said.

Who w ould have thought that the savings rate of renters would have ever have appeared "stronger" than that of some homeowners?

We agree, Ellen. Here's my column quoting Ellen Seidman as it ran Dec. 30.

In early 2007, we and the Sun-Times business section reported on a series of events unfolding related to HB 4050, the Illinois Predatory Lending Database Pilot Program.

The purpose of that law was to stem a tide of subprime lending in certain neighborhoods in Chicago. In the events of the day, that bill was pulled back, revised, and will be rolled out again in 2008.

That story was a harbinger of more dramatic events to come that ultimately called to order Federal Reserve Chairman Ben Bernahke, sent Wall Street lenders gasping for cash streams, grabbed President Bush's attention, and contributed to a financial credit crunch worldwide.

As we reported then, the original HB 4050 was revamped in the unresolved clash between home buyer advocates and lenders. Home buyer advocates wanted to flush out the predators and prevent suffering caused by inappropriate subprime loans, while lenders wanted to preserve the robust cash streams from the legitimate sub-prime market.

So here we are! The bubble has burst --finally! -- and it's ugly out there.

Except in Chicago where we have developed a few warts but can still look at ourselves in the mirror with pride. Although our home prices might be backsliding a bit, we on the third coast are holding our own much better than the bubble-iscious coasts of California, Florida and New York.

To prove a point, the latest data from Standard & Poor's/Case-Shiller home price index shows home prices falling nationally in October for the 10th consecutive month, posting their largest monthly drop since early 1991. But here in Chicago, home prices dropped only 3.2 percent in October 2007 from October of 2006. This was less than half the record national rate at 6.7.

"If you go back a year ago and look at the stories, and look at what the lending community was doing, [the problems do] tend to unfold more slowly in places like Chicago that are more stable," said Ellen Seidman, executive vice president at ShoreBank Corp. and the director of the Financial Services and Education Project at the New America Foundation. Seidman was director of the Office of Thrift Supervision between 1997 and 2001.

"I think we will see a slow rollout in Chicago in 2008 of problems," she said, "[but] fortunately we have a healthy economy."

While President Bush's plan to freeze rates on certain subprime mortgages continues its public vetting, the Federal Reserve announced stronger lending standards with the goal of being a "comprehensive set of protections to consumers."

Seidman says the goal of these proposed revisions to regulations under the Truth in Lending Act is to realign relationships in the mortgage business so a good mortgage is the outcome.

The proposed rules, Seidman said, would apply to all mortgage lenders and others (such as brokers, independent mortgage bankers and appraisers), not just to banks, thrifts, and credit unions.

The proposed regulations would "require lenders to lend based on the borrower's ability to pay at a fully indexed, fully amortizing rate, verified by independent third-party documentation. Escrows for taxes and insurance would be required (for at least the first 12 months the loan is outstanding), and prepayment penalties would have to expire at least 60 days before the first payment change," Seidman wrote in an OpEd piece in the American Banker.

The proposed regulations also address abuses in brokerage, appraisals and servicing, as well as advertising abuses, such as calling a loan fixed when it's not. Lenders would also be required to provide borrowers with information about payments, finance charges, and interest rates early in the shopping process, and before charging any application fee.

"The proposed law is pretty far-reaching," Seidman said. "There are several pieces of it that would cover all loans."

"I know how hard it is to hold on to the pro-consumer stuff that you've done when the comments start coming."

Seidman says that some areas are left untouched by the regulations. These include nationwide licensing, testing and registration of mortgage brokers; liability -- beyond the initial creditor -- for violations of standards; requirements for pre-foreclosure counseling and modification attempts; and bankruptcy law changes to permit judges to modify home mortgage loans that are "underwater."

"The Fed will try hard to hold tight," she said. "To some extent the comments by the Democrats on the Hill are a combination of wishing the Fed would go further and wishing the Fed will not go backwards."

She said, however, that "The Fed rules will not make a major change to the fact that property values are out of line. "

"2007 was not by any means the end of it," she said.