Across the country last week, many mortgage holders and prospective home buyers found themselves in a state they haven’t experienced in years: nervousness over the direction of interest rates.
Financial markets were roiled in the aftermath of the Federal Reserve Board’s decision to push its federal funds rate, the rate its member banks charge each other for loans, up one-quarter point to 3.25 percent.
Although mortgages aren’t directly affected by the Fed action, rattled borrowers are concerned that long-term loans will soon begin to rise as well, experts said.
“We don’t know if this is a knee-jerk reaction or have we truly hit the bottom of the market,” said Robert Kennedy, president of Charlotte-based Carolina Mortgage Services Inc.
From Florida to Fresno, real estate brokers and lenders last week were fielding an unusually high number of calls from customers concerned about interest rates.
“I’ve gotten a lot of calls,” said Hector Alvarez, a broker with Prime Mortgage Investors in Coral Gables, Fla. “They get nervous. It’s the whole panic system.”
Most of his customers were asking whether to lock in a rate on a mortgage rate application, he said.
Locking in on a rate protects a borrower against new rate hikes. But it precludes the consumer from taking advantage of any drop.
“I’ve had many calls,” said Kate Schoppmeyer, a Fresno Realtor. “The first question they ask is, `Do you think rates are going up?’ “
But far from driving buyers to the sidelines, Fresno real estate agents said more buyers were shopping for homes last week, concerned that mortgage rates might climb higher yet.
Housing industry officials said the Fed hike might set off a last-minute buying spree among any remaining wait-and-see home buyers.
It would take at least a 1 percent jump in rates to send home sales south, experts agreed. Both new and existing home sales have set records in recent months.
“What it will probably do is get some people who have been on the fence, off the fence,” said David Austin, president of the Central Oklahoma Home Builders Association. “That’s typically what happens.”
Although rate changes aren’t universal, most mortgage professionals said 30-year mortgages rose about one-eighth of a percentage point immediately following the Fed’s move, and are now running at about 7.5 percent annual interest.
“One mortgage banker in here today said he had five customers lock in over the weekend because of this situation,” said Danny Barash, a real estate associate with Alice Edwards Realty in southwest Broward County, Fla.
“Mortgages aren’t based on short-term rates, but they jumped right in over the weekend and raised rates.”
Charlotte-area mortgage lenders also said they had received plenty of calls from customers. Most queries were from customers with applications pending but who hadn’t locked in their rates.
Richard Allen, branch manager of Mortgage Plus Inc. in Charlotte, said he was advising customers to lock in now.
“Don’t make like Las Vegas,” he said. “Don’t gamble on it.”
But before panic sets in, some economists said, consider this: the Fed’s move could be good for mortgage rates.
The leading factor in long-term bond rates is inflationary expectations. In Charlotte, First Union chief economist David Orr said ultimately the signal the market should get is that the Fed is serious about holding inflation at bay.
“Over the course of the next three to six months we should see that it’s better for long-term interest rates that the Fed did this than that the Fed did nothing,” he said.
Hank Williams, head of residential lending at Miami’s American Savings, said the Fed’s action may actually drive long-term rates down eventually.
That’s because it could diminish inflation, which often pushes long-term rates up.
The Fed doesn’t directly control long-term interest rates, such as those on 30-year bonds.
Those rates, which largely determine home-mortgage rates, are controlled by the world’s financial markets.
Many mortgage industry representatives approved the Federal Reserve move and expressed confidence in Federal Reserve Chairman Alan Greenspan.
“I’m an Alan Greenspan supporter-he’s a pretty smart fella,” said J. Mike McGowan, president and chief executive officer of bank-holding company Valli-Corp. in Fresno.
“Historically, he’s been proved right more than wrong, and I think he’s probably right now in his prediction and in his action.”
Still, McGowan said, he expects “minimal immediate impact” from a hike in the short-term rate that is not expected to be more than a half-percent.
He thinks, however, that it should encourage people thinking about buying or refinancing a home to act now.
“Mortgage rates have been at 20-25-year lows for a while, and they won’t be there forever,” he said. “I think the trend is upward, and now is a better time than tomorrow to take advantage of the rates.”
Pat Althizer of Advisory Pacific Mortgage and president of the California Association of Mortgage Brokers said Greenspan’s earlier announcement that the Federal Reserve was contemplating an increase already has “talked the rate up.”
Althizer said he is “sort of embracing” the boost in rates because he thinks it indicates that the economy is improving and consumer confidence is up.
“We’re going back to tradition in the mortgage industry, to buyer activity instead of refinancing activity,” he said.
Kim Cavalla, vice president and area manager of Norwest Mortgage in Fresno, sees the swing to more buyer loans than refinancing already occurring.
“We have seen a significant decrease in the refinance market in the last 30-45 days,” she said. “That’s typical for December and January in the mortgage market, and I think purchase transactions will still happen.”
She said the industry has been “reveling in a low-interest-rate market for so long” that she doesn’t see anything ominous in a small upward adjustment.
“As long as it stays below 10 percent, there’s not much threat to the market,” she said.
