Thrift Chief Looks to ’95 : Worried by Latest Fed Hike, American Savings Official Sees Dip in Rate Next Year
Last week’s interest rate hike has some business leaders scratching their heads wondering whether the Federal Reserve Board’s action is going to send the country into another economic tailspin.
The Fed raised the rate it charges banks by three-quarters of a percentage point--what bankers call 75 basis points--and the increase is rippling right through to the real estate market.
In California, that market can hardly afford another hit, says Robert T. Barnum, president of American Savings Bank in Irvine, Orange County’s largest thrift and the fourth-largest in the nation.
Barnum doesn’t think the latest hike--the sixth this year--will affect the already low demand in California for home loans.
American Savings, which targets low- and moderate-income areas, is continuing to grow, he said. Unlike fixed-rate mortgages, the adjustable-rate mortgages (known as ARMs) it offers typically carry lower interest rates, which rise as a result of each Fed increase. And thrifts generally use the 11th District Cost of Funds Index (COFI), which has been the slowest-moving interest rate index.
“I don’t see people not buying,” he said. “If they now have a job and they’ve really been postponing buying a house for four years, I don’t think this rate hike is going to dampen their decision to purchase a home.”
Nevertheless, Barnum is worried that the Fed has gone too far and is jeopardizing the nation’s recovery and, worse, California’s fragile climb out of its worst recession in decades. In an interview, he discussed his concerns.
Question: With the Fed’s latest rate hike, there’s a bigger gap--nearly three percentage points--between fixed-rate mortgage loans and adjustable-rate mortgages. How long will that kind of gap last?
Answer: Not long. I think rates are going to come down next year. I don’t see any reason that they’re as high as they are now.
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Q: How much will they fall?
A: I’ll tell you my favorite quote in life: “There’s a high correlation between people who think they know what’s happening to interest rates and people with low net worth.” I use that (laughing) to guide my principles in business. But I think 100 basis points (1 percentage point) ought to be about right. That’s where the mark ought to be now. I think it’s 100 basis points too high now, so I think it’s got to come down.
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Q: Will that happen by March or April?
A: I think by the middle of the year. I just hope it comes and doesn’t get choked off.
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Q: How precarious do you think is the economy in Orange County and Southern California with the Fed’s big hike in interest rates?
A: I think we have put the California recovery at risk. There’s now a reasonable chance of us falling back into recession. That’s why I think rates are going to fall. I think the Fed is going to figure this out.
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Q: Is there any effort by business leaders to get through to the Fed, Congress or others in Washington?
A: The Business Roundtable and people like that have been talking to the government and saying, “Wall Street may want this and Wall Street may be worrying about the dollar and Wall Street may be worrying about foreign investments pulling out of Treasury bills, but let me tell you about America. Let me tell you what I’m seeing in my plant. Let me tell you what I’m seeing about wage pressure. I don’t know what you guys are looking at, but it isn’t here.”
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Q: Would it be safe to say that early this year, you were optimistic about Orange County recovering from the recession?
A: Yes, I really was.
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Q: How about now?
A: Now I’m worried. Orange County’s going to recover two years after the rest of the United States recovers. I was feeling pretty comfortable that the U.S. economy was doing really well and that Orange County was going to lag and recover with it. Now I’m worried. I really do believe interest rates are going to come down and this will all be kind of an exercise everybody’s gone through. But I’m worried that the interest rates could choke off the U.S. recovery, which I didn’t think was possible six months ago. And if we choke off the U.S. recovery, we’ll choke off Orange County and we’ll be back in the recession here.
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Q: Housing starts, home sales and other indicators fell last month here and across the nation, in some cases more than the normal seasonal decline. What’s happening?
A: I was just at a meeting nearby where this guy from Chicago was saying, “Gee, this bull real estate market we’ve had for the last three years . . .” and this all-California audience was looking at him like, “Where are you coming from?” The rest of the nation has had a hot real estate market fueled a lot by low interest rates. But no home loan market can be sustained simply by low interest rates. People have to have confidence that they’re going to have a job. If they have confidence that they’re going to have a job or their income will grow, they will go out and buy cars and houses. The Midwest has had that. California has not had that.
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Q: Do you see local consumer confidence changing at all?
A: I see it getting very, very slightly better in California. But (with the latest interest rate increase) it’s hard for us here to figure out, ‘What’s the Fed worried about here? Excess capacity all over the place? Wage pressure?’ You’ve got to be kidding me. I see people in California feeling a little better about their jobs. But buying a house, particularly buying a house in October, November? I don’t know.
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Q: Does news of rate increases hurt consumer confidence in a recovering economy?
A: I may have a different view of life sitting here in Irvine looking at the world. But I don’t know what the Fed’s looking at. I mean, inflation? Where is it? It’s not in oil. It’s not in raw materials. It’s not in wages. Different economic factors are driving the Fed to raise rates, and, boy, I tell you, sitting right here, I don’t know any business that’s worrying about runaway demand for their products.
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Q: Do you think the Fed is relying on outdated methods to measure how fast the economy is growing?
A: Right. And what scares me is that they could choke off the recovery when the recovery really has barely started, particularly in Southern California, but also in Northern California.
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Q: So how are last week’s rate increases going to shake out in the mortgage market?
A: I think on the home purchase side, it’s not going to have a lot of impact. Plus, a lot of people sit there and say, “Oh my God. They’re going to increase rates again, so I’d better go out and hurry up and do something.” Refinancings already have been hit with a knockout punch, and they won’t be affected further because a lot of people who have home equity loans tied to the prime rate are getting clobbered on their second mortgages. So they’ll want to refinance to pay off that debt. The home equity market itself will dry up.
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Q: With rising rates, borrowers have been turning to adjustable-rate mortgages. How big has that shift been?
A: From 1992 to the first part of this year, the market was 70% fixed, 30% ARM. Now it’s 35% fixed, 65% ARM.
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Q: Borrowers also need to make more money to afford the same kind of homes they could have bought two months ago or a year ago. How is that impacting loans in minority and poorer areas?
A: It’s going to be a problem for fixed-rate lenders. But it’s a great opportunity for us because with our ARMs--based on the 11th District Cost of Funds Index--are still 6.3% and fixed rates are 9.15%. So when you talk about affordability, you talk about people looking and saying, “Can I afford this monthly payment?” It’s really causing, for the first time in five years, people to ask again what COFI (Cost of Funds Index) means and what the other terms in ARMs mean. And for us, particularly in the low- and moderate-income areas, it’s really made a powerful statement about the difference between an ARM and a fixed-rate loan. We haven’t had this big a percentage-point difference in eight years.
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Q: Housing starts had been picking up in Orange County. Will this rate hike stifle that market for awhile?
A: Yeah, I think it will. Builders still are having a hard time getting financing, and they have had to come up with a lot more equity. So their cost of carrying land is going up. I still think there’s a lot of demand for new 2,000-square-foot, $180,000 houses in Southern California. But builders now have to worry about their costs, so they’re going to hold down production.
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Q: Though you don’t make business loans, you keep abreast of what that segment is doing. How is it doing?
A: What I look at are commercial vacancy rates, which are going down. And that means white-collar business is moving in. It’s the small-business operators moving in. The big manufacturing companies--the ASTs and the Hughes--are still moving out, but it’s the small service companies that seem to be moving in and causing commercial vacancy rates to go down. They’re the ones keeping the employment going. That’s why hope stays alive. I just worry that the interest rates are going to choke off the recovery.
