Lenders, Consultants Want More from Fed

The Federal Reserve’s decision Tuesday to cut interest rates 50 basis points will likely help those consumers facing collections, and could provide more liquidity for lending, though long-term implications remain to be seen, lenders and an economic consultant told insideARM.com immediately after the Fed’s announcement.

“A cut surely eases the psyche of Wall Street and lenders under pressure. Large-balance debt should be easier to service following this large cut. It should allow a larger percentage to make at least minimum payments. We would expect to see a slight decrease in collections on these types of accounts. Future collection activity may be reduced if adjustable rate mortgage payment changes eat a smaller amount of available monthly consumer cash as well,” said Morgan Brown, chief operating officer of New Day Trust Mortgage, a direct lender and broker in Laguna Beach, Calif., which produces about $250 million in loans each year.

The Federal Reserve announced a half a percentage point reduction in the federal-funds rate to 4.75 percent, and a similar cut in the discount rate to 5.25 percent.

“We think it will give a little relief for folks. We hope this will drive more deposits and a lower cost of funds, which will help us make more commercial loans,” said Maria Contreras-Sweet, chairwoman of the $60 million-asset Promérica Bank in Los Angeles, and the former California secretary of business transportation and housing. “However, this is such a small change; this is unlikely to change much in the way of commercial collections. We’d like to see the Fed to do more. We need to have a lower cost of funds so that we can lower rates down to the borrower level.”

It will also take some time to determine the international reaction and long-term stock market reaction to the change, which all affect the bank’s lending, Contreras-Sweet said. “The Fed’s decision is only one small element.”

Investors applauded the Fed’s action, sending the Dow Jones Industrial Average up 3.4 percent, or 335.9 points, to close at 13,739.39 Tuesday. The rate cut follows an onslaught of bad news in the mortgage market this summer with foreclosure rates rising, and the failure of a number of firms that specialize in loans to consumers with troubled credit history.

“I think that it’s great that the Fed has finally taken its head out of sand about the housing market,” said Steve Habetz, president of Threshold Mortgage, Westport, Conn., a firm that originates about $200 million a year in residential mortgages. “From their statement, it looks like they’re going to cut again. If this is the only move, it’s not a lot. If there is some further movement to stabilize the housing market, then it will be a good thing.”

“It will immediately affect home equity lines, but could have a chilling effect on foreign investments in U.S. treasuries, the spread on treasuries and fixed rate mortgages has been widening,” Habetz added. “This will have only a minor effect on foreclosures long-term.”

Habetz warned that a pull back in foreign investments will cause mortgage interest rates to rise, and credit problems will continue.

William B. Conerly, an economic consultant based in Lake Oswego, Ore. believes the Fed’s move will have little effect today on consumers having problems meeting their payments.

“I’m expecting a minor effect. When the Fed cuts rates, there’s a time lag between the move and its effects of six to 12 months. As far as where we will be tomorrow versus where we were yesterday, there won’t be much change,” said Conerly. “[The cut] is not going to change the economics for people facing foreclosures. If you’re not making your payments and Fed cuts rates half a percent, then you’re still not making payments.”

However, the rate cut could help people with adjustable rate mortgages that have yet to reset to market rates, according to Conerly. Those rates will move lower as a result of the cut. But some of those ARMs are scheduled to reset to require payments of several hundred dollars a month more even with the cut. So borrowers with those loans will see little relief and many will still face foreclosure.