Wednesday, Dec. 17, 2008

Consumers, businesses, economy may benefit

What does the Fed rate cut mean to you with a mortgage, car loan and credit cards?

You might be a winner if you have a home equity line of credit. But if you've socked away money in a savings account, you could be a loser.

Whether you are a winner or loser depends on your financial situation, but some experts believe the Fed's latest rate cut will help everyone by getting the economy moving again.

"All the components are there to have this economy turn around and reignite again," said Kent Steinwert, chief executive officer for Farmers & Merchants Bank of Central California.

He said it's a great time for consumers to buy homes and vehicles, and community banks have plenty of money to loan. "You're going to find great values out there and cheap interest rates."

Steinwert said the Fed's action is historic and that the record-low rates should stimulate the economy and bolster consumer confidence.

"We've got one of the best home affordability situations we've ever had," said Steinwert, noting that 30-year-fixed mortgages are down to 5 percent.

That means most median income families easily could afford most Northern San Joaquin Valley homes.

The region's median home price has fallen to about $170,000, which is affordable for families earning as little as $42,000 per year.

John Nelson, Modesto branch manager for Nor-Cal Lending, calculated how inexpensively such a home could be purchased:

With a down payment of $5,950, a buyer can get a 5 percent interest rate loan guaranteed by the Federal Housing Administration that costs $1,177 per month, including taxes, home insurance and mortgage insurance.

Nelson said that's $104 per month less than what the same house would have cost last month, when mortgage rates were 6 percent.

"This is a phenomenal opportunity," said Nelson, noting that there are plenty of FHA loans available for those whose credit ratings are average or better.

The Fed's interest rate cut also is great news for businesses, according to Jeff Burda, president of Modesto Commerce Bank.

"The most important impact will be felt by business borrowers," Burda said.

Businesses typically get prime-rate loans, expected to fall to 3 percent to 3.25 percent because of the Fed's action. "That will lower their cost of doing business, so maybe they can keep an extra employee or two," Burda said.

Burda said consumers who have home equity loans or credit card interest rates tied to the prime rate also should see immediate drops in monthly charges.

But that doesn't mean the economy will recover quickly.

"What's driving consumer loan rates right now is loan- loss rates. They're at all-time highs right now, and that constrains how much lenders can reduce their rate," said Henry Wirz, president and chief executive officer of Sacramento-based SAFE Credit Union.

Typically, the prime rate is the first to drop after a Fed rate cut. The prime, which banks charge their favored customers, was 8.25 percent slightly more than a year ago.

Homeowners with equity lines of credit, which are linked to the prime rate, could score again when that happens. They've benefited throughout the year from the long series of rate cuts.

And if the Fed cut pulls down other rates, consumers could benefit in other ways:

It's looking better for those who have equity in their homes and can still refinance.
• Credit card holders also might see lower interest rates, depending on how much banks want to protect themselves from delinquencies.
• Same for car loans, said industry analyst Jesse Toprak of Edmunds.com, a Santa Monica-based automotive information site.

Tuesday's losers are the savers, with rates falling to 1 percent or lower in some cases.

"It means that rates will be lower and will probably continue to be lower until the economy recovers, experts said," according to Wirz. "Borrowers are obviously the big beneficiaries of this."