Fed cut gives stocks soft landing

A sudden, key interest rate cut Tuesday could bring some relief to consumers with mounting credit card debt or distressed mortgages.

The Federal Reserve cut responded to a global plunge in stock markets that heightened concerns about a possible recession. For consumers struggling with their mortgages, this presents an opportunity for them to refinance, said Neal Van Zutphen, a certified financial planner with Delta Ventures Financial Counsel in Mesa.

“I’m going to guess (mortgage interest rates) are going to be as low as two, three or four years ago,” he said. “So, it’s certainly a wonderful opportunity for anybody who’s facing an adjustable rate mortgage to be looking at refinancing those things.”

Eric Bowlby, president of Amerifirst Financial in Mesa, said a drop in the federal rate usually doesn’t help the mortgage business.

“They’re doing that in anticipation of spurring the economy, and when the economy gets spurred, people pull their money out of bonds and they put it in stocks,” he said. “Then, the bond market weakens, which means rates go up because now I have to pay more to entice people to put their money in bonds.”

But the market didn’t fully recover after Tuesday’s cut, with the Dow Jones industrial average closing down 128.11 points, so rates stayed low, Bowlby said.

“So, it was a great day for locking in rates,” he said. “Now, if you’re in a loan you really can’t afford and you’re at a high interest rate, it’s a beautiful time to refinance. A lot of people forgot about Federal Housing Administration loans. Those will help out a lot of these people who are in loans they shouldn’t have taken out to begin with. They can get bailed out.”

Refinancing can be especially helpful to homeowners who are “upside down,” meaning their home value is less than their mortgages, Bowlby said.

“Too many people are walking away when they shouldn’t be walking away,” he said.

“They’re getting advice, they say ‘Oh, you’re upside down $50,000.’ That’s like saying your stock dropped 50 percent, so sell it today. People who panic and sell instead of waiting it out always lose. Real estate is a long-term investment. If you’re down $50,000 today, give it two years and you’ll be up $75,000.”

Not everyone believes the cut will help consumers.

Tracy Clark, an economist at the Bank One Economic Outlook Center at Arizona State University, said the cut was designed to “get everybody’s attention” to stop equity market plunges and growing fear of a recession, and that’s all.

“I think the lenders ... are going to continue to have tight lending standards and continue to try to make sure their balance sheets look better,” he said.

“I don’t think this is going to cause lenders to go back to lending money the way they did.”

Clark also doesn’t expect to see drops in credit card interest rates for those carrying balances.