THE ECONOMY Borrowers rejoice, but savers frown as rates plummet

One loan officer said he's seen some homeowners refinancing their mortgages for the second time in six months.
By CYNTHIA VINARSKY
VINDICATOR BUSINESS WRITER
Call it a double-edged sword.
Local bankers say the Federal Reserve's decision to drop interest rates to the lowest levels in decades is great news for borrowers -- but for savers, it means trouble.
"It helps on the loan side. I've never seen interest rates this low in my life," said Frank Paden, president of Canfield-based Farmers National Bank. "But for people who don't borrow and have money to invest, especially the senior market, they're not earning as much as they're accustomed to earning."
The Fed lowered its federal funds rate this week to 1.25 percent, its lowest since 1957, and cut its discount rate to 0.75 percent, its lowest since 1946. Like previous lending rate reductions, the action was designed to spur more consumer spending and business investment.
'A desperation move'
Will it work? John Falatok, a senior vice president for Second National Bank in Warren is doubtful.
"In my opinion, the Fed is in the unrealistic position of thinking they can legislate prosperity," he said. "Interest rates are not the only thing that influences recovery. It seems like a desperation move."
Falatok acknowledged that the further rate reduction will spur continued borrowing, but he doubts it will instill enough confidence to encourage businesses to invest in capital goods.
Borrowers benefit
On the lending side, the first borrowers to benefit from the new, lower rates will be those whose loans are tied to the federal Prime Rate, said Al Blank, a senior vice president at Warren-based First Place Bank. The prime rate has dropped a half-percent, to 4.25 percent.
He said most home equity loans move up and down with the prime rate, and those lenders will enjoy a half-percent decrease in their interest rates.
Mortgage refinancing will also be affected. Blank said homeowners have been lining up to refinance their mortgages and, in many cases, to combine mortgages, credit card debt and home equity loans into one low-interest loan. Lately, mortgage rates have been in the neighborhood of 6 percent for a 30-year loan.
Blank likes to suggest that borrowers continue to pay their former, higher payments after refinancing so that they'll pay their loan off sooner. What he urges them not to do is to start up another, new credit-card debt on top of their new, consolidated loan.
Refinancing
Daniel Plant, a vice president for Home Savings and Loan, said the Youngstown-based thrift is seeing something new with the current, historically low rates -- homeowners are coming back to refinance their mortgages twice in a year's time.
"It's definitely a strange market," he said. "We've had people who just refinanced six months ago coming in to refinance again."
The quick turnaround can actually reduce the refinancing cost, Plant explained, because the borrower may have to pay only once for title fees, appraisal fees, survey costs and other expenses.
New construction loans have also been big for Home Savings, but home mortgages for existing homes are slower.
There are lots and lots of homes for sale," Plant said. "People want to sell their existing homes so they can take advantage of the low rates to build a new home. If those existing homes would sell faster, we'd have more new construction loans."
Interest income falls
The downside to plummeting interest rates is the resulting drop in interest income for people who put their money in passbook savings accounts, certificates of deposit and money market funds.
Paden, of Farmers National, said savings account interest rates have been shrinking gradually to less than 1 percent, and some banks pay as little as 0.25 percent on a passbook savings account.
"For people who want to invest and live off the interest and pay their bills, that's a problem," Paden said.
Still, Robert Steele, another Home Savings vice president, said many investors are choosing the banks' savings vehicles, despite the low interest rates, because they're safe.
"As far as people moving money, we've seen deposit growth, even with the low interest rates, because of the stock market," Steele said. "There's no real strong alternative, and people are looking for safety."
vinarsky@vindy.com