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.
 A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the
Deadline Newsroom. |
