The federal reserve didn't go far enough to reduce interest rates and that may cause some knee jerk increases in long-term mortgage interest rates.

On March 20, the Federal Reserve lowered the federal funds rate by a half point to 5 percent and likewise sliced the discount rate by a half point to 4.5 percent.

"Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway," the Fed said.

Wall St. immediately plunged, however, disappointed rates weren't cut further by a hoped for 0.75 percent margin. After the Fed's announcement, a relatively quiet stock market day turned into a sell off that left the NASDAQ at a 29-month low and the DOW down for the day by 2 percent.

Some banks, however, began to lower their prime lending rate by an equal half point and that could mean cheaper home equity loans, experts say.

"Mortgages are bought and sold on a daily basis, so the effect of this is truly more toward the short term," said Tom Ward, president of Majestic Mortgage Corp in Chicago.

"That would be ARMs, including home equity loans. They will adjust to the prime and that rate will adjust to 8 percent and anybody with a home equity loan tied to the prime will now have 1/2 percent lower rate," he added.

Ward forecasts a widening gap between the cost of ARMs and fixed rate mortgages, making ARMs more attractive, and lenders busier than ever.

The sheer work load volume could work against fixed rates. Borrowers shouldn't expect any deep dips in long term rates.

"Lenders are so busy now, that they can set rates on a competitive basis and they are not too highly motivated to push the cutting edge of lower rates. There's a chance they will go down some more if things look worse in a couple of weeks," said Earl Peattie, president of Mortgage News Co. in Morro Bay, CA.

Some lenders may actually bump up long term fixed rates because, just as investors were expecting a larger interest rate cut, lenders were banking on it too.

"The unfortunate part of this, is that the 0.5 percent drop was already built into interest rates. This may cause rates to go up in the short term," said Rob McCarthy, a mortgage planner with 101Loan.com in Campbell, CA.

What's it all mean for mortgage consumers? The news is spotty.

Short term rates likely will fall, long term rates could jump up before settling lower than today's 6.65 percent rate reported March 20 by BankRate.com.

"If they can afford to hold off and watch the news. If the economy continues to be weak then rates probably will continue to come down," Peattie said.

For more articles by Broderick Perkins, please press here.

Published: March 22, 2001

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.