Rate cuts won't mean loans will be easier to get
Consumers like Valerie Jacobsen aren't getting much of a break on borrowing costs even after five months of interest rate cuts by the Federal Reserve.
Jacobsen, 30, wants to refinance her 7.25 percent first and 8.5 percent second mortgages into one loan at a lower cost. To cut the payments enough to recoup her $3,000 in closing costs, she needs a rate well below 6 percent. She wasn't ready when costs dipped in January and now they're back at levels that make her plan too expensive, the Austin, Minn., resident says.
"Rates I'm seeing aren't really mimicking what the Federal Reserve is doing," said Jacobsen. "I'm wondering why that is."
Trying to spur lending and avert a recession, the Fed has chopped 2.25 percentage points off its benchmark rate since September. Wariness among lenders and fears of inflation are keeping mortgage and auto loan rates close to or above levels before the central bank began easing while credit-card issuers are tightening their standards.
With many households unable to borrow, "those transactions won't happen, and that missing activity is the missing economic growth," said Neal Soss, chief economist at Credit Suisse Group in New York. "So the Fed will have to do more than otherwise to compensate."
The Fed lowered the cost of overnight loans between banks by 125 basis points, or 1.25 percentage points, over nine days in January, the fastest easing since 1990. The rate, now at 3 percent, sets the benchmark for other credit.
Consumer costs for mortgages barely budged. The average interest rate on a conventional 30-year fixed-rate mortgage stands at 5.88 percent, according to Bankrate.com, 12 basis points below the September level. For loans over $417,000 borrowers are paying an average of 6.82 percent, just 20 basis points lower than when the Fed began easing. Lenders say they are requiring a bigger down payment for that rate than before, as much as 20 percent. For buyers of new cars, a five-year loan costs 6.95 percent, 4 basis points more than in September.
Loan costs for individuals and businesses declined 45 basis points since September, according to Merrill Lynch & Co. "For every 5 basis points cut by the Fed, only 1 basis point is reaching Main Street," said David Rosenberg, Merrill Lynch's chief North America economist.
Credit-card rates, which tend to reflect Fed changes quickly, are down an average of 1.32 percentage points since the easing began, according to Cardweb.com, a Fort Myers, Fla., research organization. Yet "card issuers have tightened lending standards, so fewer people qualify for those lower rates," said Cardweb.com president Robert McKinley.
No matter how low rates go, certain consumers may be out of luck. Banks tightened standards and terms for a broad range of loan types over the past three months, according to the Fed's quarterly survey of senior loan officers. GMAC LLC said it tightened underwriting standards three times last year to the least credit-worthy borrowers.
"Mortgage and consumer credit are, and will almost certainly become, even harder to come by," said Credit Suisse's Soss.
