Very fixed rates

Federal Reserve chairman Ben Bernanke has been cutting interest rates like a lumberjack for more than a year now. So why isn't it a dime cheaper to borrow money to buy a home?

The Fed started cutting the key federal funds rate in September of 2007, chopping the benchmark number for overnight loans between banks from 5.25 percent. When the Fed cut yet again this week, the fed funds rate was down to 1 percent and economists talked seriously about the possibility of a zero percent rate in our future.

The average 30-year, fixed-rate mortgage was offered to home buyers at about 6.3 percent in September of 2007. The current rate for a similar mortgage: About 6.3 percent.

The real numbers bump up and down weekly. The latest weekly national survey by Bankrate.com pegs the average fixed-rate 30-year mortgage at 6.77 percent, but other recent weekly surveys have come up with a rate close to 6.3 percent. You get the idea.

Banks have received capital injections, ultra low-cost loans, and even federal guarantees on debt they issue, as the government responds to our financial crisis. Potential home buyers, the very people the economy needs to get back on their feet, haven't seen anything resembling a break on conventional mortgage rates.

Back to the question: Why? The answer is influenced by two factors, one that pertains to a very bad economy and one that is tied specifically to our current financial meltdown.

First, the kinds of short-term interest rates the Federal Reserve regularly influences don't have much to do with mortgages. Home loan rates tend to track the ups and downs of longer-term debts, particularly 10-year US Treasury notes, with yields set by investors who buy and sell those securities.

The 10-year Treasury rate has fallen about 0.4 percent to 3.97 percent since September 2007. Not exactly wrenching change, but a legitimate decline.

That relationship between mortgage interest and rates for super-safe longer-term securities like Treasury notes tends to get stretched anytime the economy goes bad. Mortgage rates are moderately higher than 10-year Treasury yields in more normal times and even more expensive than the government debt in a recession. Any kind of a risk comes with a price.

"Risk premiums are being charged across all classes of lending," says economist Brian Bethune of Global Insight in Waltham. "You name it, you pay more. That's just a consequence of the business cycle we're in."

But there's a twist in the typical story this time. The federal government, stepping in to take control at Fannie Mae and Freddie Mac, is clearly standing behind the mortgage securities they issue. Shouldn't that help rates?

It should, and it might. But it hasn't done much so far. Interest rates Fannie Mae and Freddie Mac pay to borrow the money they need to buy mortgages have actually gone up since the government got behind the big lenders. That doesn't seem to make any sense.

One likely answer: Foreign investors are looking for very explicit assurances about the government's backing of mortgage securities issued by Fannie and Freddie. James Lockhart, director of the agency that regulates the two big lenders, called the federal guarantee "explicit" last week. But later he clarified his comments and called it an "effective" guarantee. Lockhart was trying to assure investors, but only blurred the message.

"There's been some discussion about just how rock solid those government guarantees have been," says economist Mark Zandi of Moody's Economy.com. "It's kind of a silly debate, but it's important to global investors."

Add all that together and you've got mortgage rates that haven't budged an inch since the Federal Reserve decided the economy needed a boost. But those rates could come down modestly.

Confusion about the government's support of mortgage securities issued by Fannie Mae and Freddie Mac should be cleared up before too long. That would be a clear plus for home buyers.

Some economists also believe most longer-term interest rates are too high, given the weak state of the economy, and may decline. That could filter down to mortgage rates, too.

"Certainly lower rates would be a big plus for the housing market and, by extension, the economy," says Zandi. "Rates just south of 6 percent, a half percent lower, that would make a huge difference."

Everything makes a difference right now.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.