Not all borrowers benefit from Fed’s recent rate cuts
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bear stearns, feds, rate cuts March 26th, 2008By JEFF D. OPDYKE and JANE J. KIM
THE WALL STREET JOURNAL
The Federal Reserve has lowered interest rates for the sixth time since September, but the campaign is helping with only certain kinds of borrowing.
Rates on home-equity lines of credit, credit cards and auto loans have all dropped. In addition, millions of homeowners will not face higher rates as their adjustable-rate mortgages reset.
But for new-home buyers and those looking to refinance their mortgage, the Fed’s rate-cutting campaign has provided little relief.
Rates on 30-year mortgages fell to about 5.75 percent earlier this week, amid anticipation that the Fed would slash its key federal-funds rate by a full percentage point. After the Fed instead cut rates last week by three-quarters of a point, rates on 30-year mortgages bounced back to about 6 percent for some lenders.
What’s up? Blame the investors who buy packages of mortgages on Wall Street.
Burned by the subprime-lending scandal and a rising level of defaults, these investors, who include pension funds, insurance companies and bond mutual funds, are demanding a greater premium for mortgages over risk-free investments such as U.S. Treasurys.
If the mortgage market were functioning normally, rates would be in the low 5 percent range for a 30-year mortgage, says Frank Trotter, president of EverBank Direct, which originates mortgages. Mortgage rates typically follow the 10-year Treasury and have historically traded at about 1.8 percentage points above the 10-year Treasury yield. Those Treasurys currently yield about 3.451 percent.
Rates on home-equity lines of credit have dropped to 6.27 percent from 8.25 percent since September of last year, according to Bankrate.com. Partly as a result, the amount that homeowners borrowed against their lines of credit rose slightly in the fourth quarter of 2007 — the first such rise since early 2005. Rates on home-equity lines of credit should fall further after the Fed’s latest cuts.
When it comes to credit cards, average rates on variable-rate cards have fallen to 12.36 percent from 13.97 percent last fall, according to Bankrate.com. But for some cardholders, the Fed rate cut may not have as much impact as previous cuts because of “floor rates,” or predetermined points below which rates will not fall, no matter how low interest rates go. The last time consumers hit floor rates was between late 2001 and 2003, when interest rates were falling.
The rate cut will likely have little effect on new-car loans because many are already offered at reduced rates because of heavy manufacturer incentives. Average rates on five-year new-car loans have dropped to 7.22 percent from 7.72 percent in early September, according to Bankrate.com.
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