Fed’s Action Should Accelerate Drop in Key Rates : Interest: Consumers can expect cheaper long-term mortgages. But don’t look for auto and personal loans or credit card rates to come down much, the experts say.
Interest rates have begun to come down again--in some cases surpassing the lows reached in January--and the Federal Reserve’s decision Thursday to drive down the federal funds rate should accelerate the drop in many key rates over the next few weeks, experts predict.
Although the federal funds rate drop to 3.75% from 4% applies only to the interest that banks charge each other, rates on short-term Treasury bills have declined sharply since mid-March, while long-term mortgage rates have slipped in the last two weeks. These and other rates had been rising in the two months before that, in part because of investor fears that the budding economic recovery would spur inflation and tighter credit.
The latest declines in rates--due in part to new evidence that the recovery is weak--are bringing smiles to the faces of frustrated house hunters and homeowners who missed out on a frenetic round of home refinancing earlier this year when 30-year fixed mortgage rates plunged to a national average of 8.31% on Jan. 10, the lowest level since the mid-1970s and about half a percentage point lower than today’s rate. Lower borrowing costs are also expected to help corporate borrowers and bankers shore up their bottom lines.
“It’s opportunity time again,” declared Chuck Lamb, president of the California Assn. of Realtors. He said that if, as expected, the federal funds rate drop translates into a quarter-percent decline in mortgage rates, an additional 38,000 Californians will be able to afford to buy a median-priced home in the state.
Indeed, despite signs of continued weakness in the nation’s housing markets, some bullish lenders are lining up huge amounts of mortgage financing in anticipation of strong home-buying demand this spring and summer.
This week, for example, the Federal National Mortgage Assn. agreed to buy $6 billion worth of fixed-rate mortgages from Great Western Bank of Beverly Hills. That pact follows a March 30 agreement by the congressionally chartered mortgage buyer to purchase $4 billion worth of loans from Source One Mortgage Services Corp. in Farmington Hill, Mich.
Independent mortgage lenders are also bolstering their ability to provide more loans.
Countrywide Credit Industries Inc., a Pasadena-based mortgage banker that had a record $2.1 billion in loans last month, is now negotiating to sell a record-size loan package to three mortgage loan buyers, said Stanford Kurland, Countrywide’s chief operating officer.
“It’s an election year; everybody’s going to make sure that the American homeowner doesn’t suffer,” said Eugene J. Lavigne, a vice president at Source One, which has mortgage lending operations in 42 states.
But the drop in interest rates is not expected to help other consumers who have seen little if any decline in the last year in the rates lenders charge on car loans, personal loans and credit cards. Losers include retirees and other Americans who depend on interest income for their daily living expenses.
“The interest from my CDs used to be a big help, now they are almost no help at all” because of the decline in rates, said Mamie Washington, a 73-year-old retired Los Angeles hairdresser who invested the profits from the sale of her two-bedroom house in bank certificates of deposit four years ago and uses the interest to pay the rent on her one-bedroom apartment. But Washington said this year she has been forced to work occasionally to make ends meet.
Investors in three-month Treasury bills have seen their so-called discount rate plunge to 3.66% from 4.06% on March 20. The previous low for the year had been 3.77% on Jan. 24. The discount rate is the percentage that those issues are selling below their face value paid at maturity.
Although most experts do not expect most other rates to drop below their lows of earlier this year, some rates may be volatile. Martha Wittbrodt, editor of IBC-Donoghue’s Money Fund Report in Ashland, Mass., for example, said money funds rose slightly this week to 3.74%. But she expects “a couple of basis points decline” in the wake of the Fed’s action on Thursday.
However, economists say that banks are not likely to cut their prime lending rate, now at 6.5%, in response to the Fed’s action. What’s more, they said it will probably take a few days for the rate cuts to be fully reflected in 30-year fixed mortgage rates, which dropped to a national average of 8.91% on Thursday from 9.05% last week. Still, experts advised homeowners and house hunters not to procrastinate about locking in low rates.
“The people that waited throughout 1991 were rewarded with low rates, but that’s not going to happen again,” said Paul Havemann, vice president at HSH Associates, a Butler, N.J.-based publisher of mortgage information.
“People who missed out on the (earlier) lower rates should see this as their second chance,” Havemann said. “And they should not be inclined to blow it this time.”
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How Rates Plunged Thursday
Interest rates tumbled across the board after the Fed signaled that it was easing credit once again.
Wed. Thurs. Point Treasury security rate rate change 3-month T-bill 3.84% 3.66% -0.18 6-month T-bill 3.94% 3.74% -0.20 1-year T-bill 4.11% 3.90% -0.21 5-year T-note 6.72% 6.58% -0.14 10-year T-note 7.42% 7.33% -0.09 30-year T-bond 7.91% 7.86% -0.05
T-bill rates are discount rates.
