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Interest Rate Increase Won't Change Much

Reserve Board: A quarter- to half-point hike is expected and would have little impact.

March 25, 1997|JAMES S. GRANELLI | TIMES STAFF WRITER

With economists and other prognosticators expecting an interest-rate hike, today's decision by the Federal Reserve Board should be a nonevent.

But then again, anything can happen.

"The biggest reaction probably will be if the Fed doesn't raise rates," said Thomas E. Prince, chief financial officer for Downey Savings & Loan in Newport Beach.

Or if the Fed raises its rate a full percentage point, said Donald H. Kasle, president of Western Financial Bank in Irvine.

If the Fed acts as expected, however--raising its discount rate a quarter to half a point--the decision shouldn't have much of an impact, said Walter Hahn, an economist at E&Y Kenneth Leventhal Real Estate Group in Newport Beach.

"The thing that would make a difference in the economy is if the bond interest rates took a jump," Hahn said. "That does have an immediate effect on mortgage interest rates."

The bond market reacts more to news of inflation because inflation eats away at interest income. As bond rates go up, so do fixed mortgage rates.

"Three years ago, everybody was spooked about inflation, so mortgage rates went up too. Every time the Fed opened its mouth, inflation was getting out of control," he said.

"But this time around, the Fed is being very vigilant to make sure they're ahead of the game," he said. "If the Fed doesn't raise rates [today], the [bond market] will get spooked again."

Earl Peattie, president of Mortgage News Co. in Santa Ana, said mortgage rates have been creeping up in the last month as lenders anticipated that the Fed would raise its rate. Peattie compiles a blended rate from at least 17 of the Southland's biggest providers of home loans.

Since mid-February, the blended rate has crept up from 7.548% to 7.929% on Monday.

"A lot of the effect of the Fed bumping up rates already has been built into the mortgage rates," he said.

While fixed-rate mortgages may not be affected, variable rates, especially on such items as car loans, probably would rise in a month or so, said Kasle, whose Western Financial thrift is one of the nation's larger auto financing institutions.

"As rates go up, it can depress the new car market," he said, "but it also can ignite the used car market."

Though a small rate hike may not affect fixed-rate mortgages, it likely will have a bigger psychological impact on buyers, he said.

"You will find that [loan] applications outstanding from borrowers will close now," he said. "You'll see home buyers hurry up with their decisions, fearing that rates will go higher soon."

He also said an increase in the rate would put pressure on financial institutions to raise their deposit rates, though any increases aren't expected to mirror the Fed's hike.

It's also possible that nothing will happen in the wake of a small rate hike by the Fed.

"There are lots of examples in past years of quarter- to half-point changes up and down where we have not seen any movement by banks to change rates on either deposits or loans," Kasle said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

A Fix on Mortgage Rates

Composite 30-year, fixed mortgage rate compiled with data from 17 Southern California lenders charging an average of 1.8 points:

January

2 7.732%

3 7.749

6 7.756

7 7.767

8 7.756

9 7.765

10 7.828

13 7.813

14 7.795

15 7.793

16 7.721

17 7.765

21 7.771

22 7.717

23 7.719

24 7.785

27 7.788

28 7.748

29 7.775

30 7.734

31 7.704

February

3 7.664%

4 7.667

5 7.642

6 7.659

7 7.616

10 7.610

11 7.610

12 7.616

13 7.595

14 7.553

18 7.548

19 7.553

20 7.576

21 7.584

24 7.589

25 7.576

26 7.607

27 7.680

28 7.766

March

3 7.792

4 7.768

5 7.799

6 7.766

7 7.761

10 7.731

11 7.742

12 7.758

13 7.786

14 7.836

17 7.865

18 7.862

19 7.857

20 7.899

21 7.917

24 7.929

Source: Mortgage News

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