Fed's cut a short-term cure for struggling homeowners
By Stephanie Armour and Sandra Block
USA Today
The Federal Reserve sliced another 0.25 percent off its benchmark overnight lending rate yesterday — the latest in an interest-rate-cutting drive over the past seven months that's helped lower the yields that many adjustable-rate mortgages are tied to.
Thanks to the Fed's cuts, the rates to which those ARMs have been resetting have sometimes saved homeowners hundreds of dollars. For some struggling mortgage holders, the lower rates have helped stave off delinquencies or foreclosures.
"This could be the difference between a person being current (on a mortgage) or delinquent," says Orawin Velz, senior research director at the Mortgage Bankers Association. "The risk of foreclosures due to resets has declined."
But yesterday's cut might not bring any further relief for ARM holders, says Greg McBride, a senior analyst at Bankrate.com. The benchmark indexes for ARMs had already factored in yesterday's Fed rate cut, he says. ARM holders, McBride says, "got the benefit back in March."
Still, the Fed's action, its seventh cut since September, could bring other benefits. The average rate on a home-equity line of credit fell to 5.7 percent last week from 7.3 percent in January, Bankrate.com says; the average on a home-equity loan was 7.73 percent. Those rates move in direct response to Fed cuts, so they could fall further this week, McBride says.
Other effects on consumers:
Last week, the average 1-year CD rate was 1.93 percent, Bankrate.com says. But to try to draw more deposits, some financial institutions are dangling much higher rates, McBride says, so savers should shop around.
A majority of subprime mortgages are tied to the three-month LIBOR (the London interbank offered rate). That rate has dropped from 5.4 percent in July 2007 to 3 percent in April 2008.
For many prime borrowers, too, Fed cuts have meant lower resets on their ARMs. Before the housing boom peaked in 2005, many buyers were able to buy homes by taking on ARMs that carried low payments that would escalate once the rates reset. And 2008 marks a peak when a huge chunk of those loans will reset; many loans that originated in 2006 reset this year.
As the Fed has cut rates, the rates on the indexes used to set rates on ARMs have also declined. The yield on the 1-year Treasury — to which most prime ARMs are linked — fell from 5.7 percent in July 2007 to 5.2 percent last month. (Contributing to that decline was rising demand for Treasuries from investors seeking the safety of U.S.-backed securities.)
HAWAI'I BANKS FOLLOW SUIT
Hawai'i's top banks all followed the Fed's lead, announcing cuts in their prime rates to 5 percent from 5.25 percent.
The cuts by First Hawaiian Bank, Bank of Hawaii, American Savings Bank and Central Pacific Bank are effective today.
