The economic contraction is likely to continue into the first half of 2009, causing a prolonged recession, Federal Reserve Bank of Boston president and CEO Eric Rosengren said in a speech late last week. "We are seeing businesses retrenching and unemployment rising, and many of our international trading partners expect equally grim results," Rosengren said. " As a result, this recession looks to be longer and more severe than was originally forecast. Still, there are indications that the second half of the year will show improvement." Energy prices fell, for example, increasing the affordability of gasoline for cars and heating for homes. Fiscal stimulus packages likely forthcoming with President-elect Barack Obama's administration will boost the economy, he said. Though aid may be on the way, it has been a harsh year in the broad economy as well as the housing market. The typical cause of such a decline in the housing market traces back to high mortgage rates. "During more normal times, the Federal Reserve can address this by reducing the federal funds rate, a step that usually helps to lower mortgage rates -- and the housing market improves," he said. "But this housing downturn is different. Increasingly, the housing market is impacted more by the availability of credit than the cost of credit." The Fed recently lowered its federal funds rate to a range of zero to 0.25 percent, making money cheaper than its ever been for banks. And, although mortgage rates have inched down to the 5 percent marker, far-reaching results have been scarce so far. In theory, lower mortgage rates give potential home buyers increased affordability and they provide greater opportunity to refinance, which makes payments more affordable and frees up household income to consume other goods and products, which in turn benefits the economy, Rosengren said. Low mortgage rates specifically benefit home buyers and those looking to refinance with significant equity for a down payment and good credit scores. He also noted that, should prices stabilize, home owners and holders of mortgage instruments will benefit from low rates, as well. But there are "clearly" a segment of borrowers unlikely to benefit from these low rates because they suffer negative home equity or poor credit scores, he said. Within this sector of the marketplace are those troubled borrowers that still make payments despite impaired credit and/or equity, those who are temporarily unemployed due to reduced hours, unemployment or health issues, and those whose inability to pay Rosengren calls "permanent." For the first type, he suggested increasing eligibility and access to Federal Housing Administration-endorsed loans. For the middle group experiencing a temporary "difficult period," he suggested a deferred payment program or reduction in interest rate to prevent the foreclosure. For the final part of this segment -- those whose means do not make repayment a possibility -- Rosengren said "it may well be impossible for lenders and borrowers to work out a plan. But that does not mean that nothing can be done to make the best of a difficult situation, for the borrower as well as their neighbors and the housing market in their area." He suggested renting as an alternative for these borrowers, or possibly a "significant financial commitment" on the part of the government to make the mortgage terms affordable to the borrower and acceptable to the lender, although Rosengren admitted "the cost of such a program would likely be very high." Lawmakers may not take to this option very well, considering the cost of Obama's proposed stimulus package and the outlook that the national deficit will remain at trillions of dollars in coming years. "Given all these factors, it is important to recognize that no one solution is likely to fix our housing market challenges," Rosengren said. Read his speech. Write to Diana Golobay at diana.golobay@housingwire.com.