Early Christmas for Borrowers
American consumers are likely to be among the big beneficiaries of the Federal Reserve Board’s latest interest rate cut--the second in three weeks--with cheaper mortgages, credit card rates and home equity loans on the horizon.
And the boon to borrowers won’t come at the expense of savers, who are unlikely to see bank certificate of deposit rates fall much further, analysts say.
But no rate cut comes without cost, and consumers’ good fortune will come partly at the expense of smaller banks that are seeing their profit margins dwindle along with interest rates.
Most banks are expected to follow the Fed’s lead by lowering their prime rates--the benchmark interest rate that determines costs for many credit cards, home equity loans and business lending--from 8.25% to 8%. Among the banks that did so on Thursday: Chase Manhattan, First Union, Norwest and Bank One.
Credit card borrowers, who were already on track to save more than $600 million annually thanks to the Fed’s Sept. 29 rate cut, are now likely to save twice as much, said Robert McKinley, publisher of CardTrak, which monitors credit card trends. More than 60% of credit card rates are tied to the prime, and Thursday’s rate cut is likely to be reflected in lower interest charges by January.
The total savings for a typical borrower with $5,000 in credit card debt will be modest--about $28 a year. But total savings to all card borrowers will probably be more than $1.2 billion with the two Fed cuts, McKinley said.
Other lending rates tied to the prime, such as many home equity and small-business loans, are also expected to fall, as are mortgage rates--good news to many borrowers whose home loans were threatened by market turmoil last week.
After hitting 30-year lows, home loan rates jumped unexpectedly Oct. 8 and 9, reflecting a sudden climb in the 10-year Treasury bond as investors unwound complex bets involving the Japanese yen. The average rate for a 30-year fixed mortgage in California leaped from a low of 6.11% on Oct. 5 to 6.77% on Oct. 9.
Since Monday, rates have been drifting back down, said Earl Peattie, president of Mortgage News Co. of Morro Bay. The rate for a 30-year fixed mortgage Thursday was 6.41%, before the Fed cut its rate.
Peattie and other mortgage watchers are optimistic that much, if not all, of the Fed cut will be reflected in mortgage rates.
Mortgage rates traditionally have tracked five-year and 10-year Treasury bond rates--which on Thursday dropped by 0.25 percentage point and 0.20 percentage point, respectively.
Thursday’s move “will return us pretty close to where we were before the [mortgage] market took a pounding,” said Ed Rosenblum, a broker with Flagship Mortgage in Valley Village.
Aran Dokovna, a Valencia certified public accountant, said the cut renewed his hopes that he could save up to $300 a month by refinancing his home.
“I had just started [the application process] last week when the carpet started moving from underneath me,” Dokovna said. “I figured it [the mortgage rate] was going to come back down, so I put off turning in the paperwork.”
Typically, interest rate cuts swing both ways, hurting savers even as they benefit borrowers. But already-low rates on CDs and other savings accounts are unlikely to go much lower, bank experts said.
A still-strong domestic economy means banks want to make loans and they have to pay high enough rates to attract deposits, said Martin Bradshaw of Bradshaw Financial Network, which tracks CD rates. Short-term CD rates could fall slightly, but banks are not likely to pass on the full quarter-point Fed cut, he said.
“They [banks] are already pushing the envelope as far as how low rates can be,” Bradshaw said.
That difficulty in lowering savings rates is helping to squeeze banks’ profit margins, analysts said. Hardest hit are small banks that also have much of their loan portfolio tied to the prime rate, which means they have to make cheaper loans without simultaneously being able to reduce the cost of their funds to make the loans. Larger lenders typically tie their commercial loans to the London Interbank offered rate, or LIBOR, which does not tend to reflect Federal Reserve moves as closely as does the prime rate.
“A lot of community banks have well over 50% of their portfolios tied to the prime, and without question that squeezes their [profit] margins harder,” said John Rebelo, president of the California Bankers Assn. He said small banks hope to offset some of the damage by making more loans, assuming cheaper rates encourage borrowing.
The same squeeze could affect larger banks if rates continue to drop, said Joseph Morford, analyst with Van Kasper & Co. in San Francisco. “It’s not a serious threat right now, but it will crimp profits into 1999 if we continue to see the Fed ease,” Morford said.
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Liz Pulliam can be reached by e-mail at liz.pulliam@latimes.com.
