Rate cut expected to
help home shoppers,
hurt savers

The Fed's move could fuel
a refinancing boom

By Rob Perez
Star-Bulletin

Hawaii consumers shopping for loans to purchase homes or other big-ticket items will benefit from the Federal Reserve's quarter-point cut today in short-term interest rates to 5.25 percent.

But savers won't fare as well: the cut in short-term rates likely will put more pressure on banks and other financial institutions to lower rates on passbook savings accounts and certificates of deposit.

That was the assessment of Hawaii officials on the eve of the Fed's Open Market Committee meeting.

Most analysts had expected policy-makers to cut rates for the first time in nearly three years. The only question was the size of the cut.

Though the quarter-point rate reduction isn't tied directly to fixed-rate mortgages, which track long-term rates, any cut by the Fed normally leads to lower mortgage rates.

And lower mortgage rates increase the buying power of people shopping for homes, something that local industry officials see as a plus in a market marked by dramatic price declines in recent years.

"I think (a rate cut) will certainly help stabilize prices," said Myra Darby Brandt, broker owner of RE/MAX Honolulu.

It also is expected to fuel a refinancing boom locally. Lenders say they have seen a surge in refinancings the past several months as fixed-rate loans have dipped below 7 percent.

But not all homeowners have been able to benefit from the low rates.

Many who purchased their homes within the past two or three years have been unable to refinance because their properties generally have fallen in value or, at best, held steady.

In some West Oahu neighborhoods, for instance, prices have fallen at least $20,000 in just the last two years, after having dropped steadily for several years prior to that.

For homeowners who took out conventional loans and put minimum amounts down, the fallen values mean they usually don't have enough equity in their homes to be able to refinance, lenders say. Yet many are calling unaware of the equity requirements.

"That's the problem we're seeing a lot of now," said Michael Macdonald, loan officer for Norwest Mortgage of Hawaii.

"I've got to call them back and give them the bad news."

In most conventional-loan refinancings, borrowers must have at least 10 percent equity in their homes, though some programs allow only 5 percent.

But even 5 percent would be tough to meet if home values haven't appreciated, lenders say.

For government-backed loans such as those guaranteed by the Federal Housing Administration or the Veterans Administration, equity issues aren't a factor.

Elaine Conroy, office manager for Irwin Mortgage in Honolulu, said her office has been doing more of those type of refinancings. And further rate cuts, she said, will only fuel the boom.

Consumers shopping for other types of loans, such as auto loans, also will benefit, lenders say.

For savers, however, the Fed's action won't be welcomed. Many institutions within a week could lower their passbook and CD rates in response, lenders said.

The industry already has lowered rates as other short-term benchmarks have fallen in recent months. Passbook accounts typically are earning only about 2.5 percent interest, while most CD rates have dipped below 5 percent.

"We're human beings and we don't want to turn off customers," said Neal Kanda, executive vice president of Central Pacific Bank. "But we have to be in line with market rates."